Growth stocks show resilience Seeking alpha
Originally published on May 20, 2024
Year-to-date, stocks have proven resilient in the face of higher interest rates and calmer expectations for monetary easing. Back in February, I suggested several factors that would support stocks, despite rising interest rates. Today I still believe The market could move higher, with the added qualification that growth stocks, which have suffered disproportionately in 2022, could continue to lead. Differences between today and two years ago include lower interest rate hikes and a more moderate economic outlook.
Difference in size
Two years ago, growth stocks were one of the hardest-hit investment styles. Growth stocks are defined as companies that are growing their stock prices, revenues, profits, or cash flows at faster rates than the market as a whole. This made sense since growth, especially “early” growth companies, have more distant cash flows, which in turn are penalized more by High interest rates.
In 2022, the Russell 1000 Growth Index is down nearly 30% versus -20% and -10% returns for the S&P 500 and Russell 1000 Value, respectively. Fortunately, this year proved to be different. The Russell 1000 grew by about 11%, beating the market, as measured by the S&P 500, by about 3% and value, as measured by the Russell 1000 Value Index, by about 6%. What explains the difference?
Initially, this year’s price increase was more contained. Heading into 2022, 10-year bond yields rose, rising from about 1.5% at the start of the year to an October peak of about 4.5%. Interestingly, this increase was not driven by rising inflation expectations, which actually rose in 2021. Instead, the driver was mostly a shift in real, or inflation-adjusted, interest rates. Using the US TIPS market, 10-year real yields have started 2022 in negative territory, at around -1%. By the end of the year, the percentage was more than 1.5%.
The back-up in interest rates this year has been, so far, more subdued. 10-year bond yields are 50-60 basis points higher than at the start of the year, with a similar movement in real yields. That leaves rates about where they were last Thanksgiving.
Another difference: Interest rate hikes in 2022 were more volatile. From the fall of 2021 to the fall of 2022, the MOVE index, which tracks index options tied to interest rates, rose more than 200%. The reserve rise in prices this year proved to be more orderly. The magnitude of the rate peaked in 2023 and is slightly lower year-to-date (see Chart 1).
US Treasury fluctuations
Economic flexibility leads to market flexibility
The other big difference between 2022 and today is the more moderate economic backdrop. When tech companies were punished in 2022, investors were increasingly ignoring the Fed-induced recession. Today, the Federal Reserve is preparing to cut interest rates, albeit later than investors had hoped, and economic growth estimates are rising. According to Bloomberg, economic estimates for 2024 economic growth, measured by real GDP growth, rose from 1.3% in January to 2.4% today.
While investors always prefer lower to higher interest rates, stocks can survive modestly higher rates if they are accompanied by stronger growth. Moreover, growth-oriented, large-cap companies have some of the strongest balance sheets and benefit most from many secular trends, such as artificial intelligence (AI), that support a resilient economy. We believe they can continue to lead. In this environment, we would call for a continued overweight to market segments associated with secular growth themes, especially companies associated with the advancement of AI across the market.
This post originally appeared on iShares Market Insights.
Editor’s note: The summary points for this article were selected by Seeking Alpha editors.