When stocks swooned in the fourth quarter of 2018, some of the worst offenders were growth names. This year, the situation is reversed with growth stocks and the corresponding exchange traded funds leading the broader market higher.
Year-to-date, the iShares S&P 500 Growth ETF (NYSEArca: IVW) and the SPDR S&P 500 Growth ETF (NYSEArca: SPYG), both of which track the S&P 500 Growth Index, are up 13%, beating the S&P 500 by 50 basis points.
Technology’s long out-performance of financials explains why growth has been easily topping value for about a decade. For more than two decades, technology has been the largest sector weight in the S&P 500 Growth Index while financials have been the largest sector exposure in the value benchmark.
“Stocks with high-growth potential, such as the tech names, typically get a bid when the economy is strong as investors are more willing to pay a higher price for a bigger payoff,” reports CNBC. “During a downturn, investors tend to hide out in value stocks which have lower valuations and more consistent profits.”
Earnings Talk
Growth stocks attain that designation by posting higher earnings and revenue growth than their value counterparts, but when Wall Street trims earnings estimates on growth names, the stocks become vulnerable. On the other hand, some analysts see the recent spate of downward earnings revisions on growth names as an opportunity to buy some dips.
“Earnings numbers have been cut drastically for these guys, way more than the S&P 500, way more than the value stocks so I think there just lies opportunity there when we do get that economic growth back,” said Lindsey Bell, investment strategist at CFRA Research, in an interview with CNBC.
IVW and SPYG each allocate about 43% of their combined weights to technology and healthcare stocks. Communication services and consumer discretionary names combine for almost 27% of the ETFs’ rosters.
“The Street anticipates earnings for growth stocks to fall by 0.6 percent this year, said Bell, far worse than initial expectations for an increase of 7.6 percent. By comparison, value earnings growth was reduced to 4.4 percent growth from 7.5 percent,” according to CNBC.