Financial markets are awash in earnings reports, and investors are being reminded that technology is one of the primary destinations when it comes to earnings growth.
However, investors shouldn’t just charge blindly into growth stocks in search of above-average returns. Although S&P 500 earnings growth is slated to increase this year, focusing on quality and fundamentals remains important. The T. Rowe Price Blue Chip Growth ETF (TCHP) checks those boxes.
TCHP, which focuses on high-quality large-cap growth stocks, is a relevant consideration for astute investors when many market participants are focusing on volatile meme stocks while others fret about earnings disconnects created by the coronavirus pandemic.
“Corporate earnings and earnings growth expectations both surged in the first quarter, particularly in the U.S. However, equity prices rose even faster, pushing valuations in many markets toward historical extremes,” according to T. Rowe Price.
Robert Sharps, T. Rowe Price President and Head of Investments, notes that despite phenomena such as meme stocks and special purposes, acquisition companies (SPACs) markets aren’t in bubble territory. However, returns could be muted if economic growth remains sturdy for an extended period. Sharps also notes that valuation isn’t a great timing indicator, but it has uses of merit for investors.
“Valuation historically has not been a good tactical timing tool,” Sharps says. “But it’s typically been a good forward indicator of return potential relative to longer-term averages. I don’t think the starting point today bodes very well for robust returns going forward.”
Should economic growth return to more normalized levels – it’s currently being skewed higher by the rebound from the coronavirus recession – that could compel investors to return to once-beloved large-cap growth stocks – TCHP’s bread and butter. The fund is significantly overweight technology, communication services, and consumer discretionary stocks relative to the S&P 500. According to issuer data, those growth destinations combined for about 84% of TCHP’s roster at the end of the second quarter.
Even if a significant return to growth stocks doesn’t materialize, TCHP still merits consideration because quality is trading at a discount and is increasingly important as the economic cycle ages.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.