Home Stock Markets Growth Stocks Have Rallied. Don’t Go Too Nuts for Them, UBS Says.

Growth Stocks Have Rallied. Don’t Go Too Nuts for Them, UBS Says.

by WOOWinvest
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Growth Stocks Have Rallied. Don’t Go Too Nuts for Them, UBS Says.

Growth stocks are on quite a run over the past seven weeks amid anticipation the Federal Reserve might curb its interest-rate increases.

The Russell 1000 Growth index has soared 18% since June 16, compared with a rise of half that for the Russell 1000 Value index.

Higher interest rates hurt growth stocks by making their expected earnings stream less valuable than Treasury securities with rising yields.

Hopes for smaller Fed rate increases were dashed by the Aug. 5 news that payrolls surged 528,000 in July, and the unemployment rate matched a 50-year low of 3.5%.

Until the employment report, the consensus view was that the Fed would raise interest rates by 50 basis points (0.5 percentage point) at its September meeting.

But now, 75 basis points “will certainly be on the table,” Randall Kroszner, an economics professor at the University of Chicago and a former Fed governor, told Bloomberg.

UBS Pessimism on Growth Stocks

Even a day before the jobs report, UBS strategists expressed caution about growth stocks.

“While the recent rally is encouraging, we continue to maintain a selective approach to longer-term growth stocks and keep our preference for value over growth in the near term,” they wrote in a commentary. They cited several issues in addition to Fed policy.

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· “The rebound has pushed up valuations of megatech companies,” the strategists note. Forward price-earnings multiples for global tech companies are 21, back above their long-term average of 19.

As for unprofitable tech companies, “the rising cost of capital, tightening financial conditions, and growing recession risks are likely to limit their upside,” the strategists said.

· “Economic headwinds also add to uncertainties,” they said. “Major companies, including Alphabet (GOOGL) – Get Alphabet Inc. ReportApple (AAPL) – Get Apple Inc. ReportMicrosoft (MSFT) – Get Microsoft Corporation Reportand Meta Platforms (META) – Get Meta Platforms Inc. Report, have indicated a slowing pace of hiring for the rest of the year.” That suggests “megatech firms are bracing for a more uncertain economic outlook,” the strategists said.

· Cuts in advertising budgets are likely, and “the squeeze on household disposable income through inflation should weigh on discretionary consumer spending,” they said. That means trouble for e-commerce and digital media companies.

“Meanwhile, reduced capital expenditure and elevated inventories will likely weigh on semiconductor and hardware companies,” the strategists said.

A Vote for Value

“So, with near-term uncertainty around inflation, Fed policy, and global growth, we continue to favor investing in value with a quality tilt, energy stocks, and the UK market,” the strategists said.

“Our analysis, stretching back to 1975, shows that when inflation has been above 3%, value stocks have outperformed growth stocks, regardless of the stage of the economic cycle.” US consumer prices soared 9.1% in the 12 months through June.

In addition, “growth stocks are still expensive relative to value stocks,” the strategists said. The price-to-earnings premium for the Russell 1000 Growth index over the Russell 1000 Value index is about double the long-term average of 35%.

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