From Growth to Value: Where We Are in the Equity Markets

Market Rotation Catalysts and Current Status

• The shift from growth to value is driven by economic recovery acceleration, specifically vaccine rollouts (Pfizer), reopening in the U.S., and expected global reopenings over the next six months.
• These drivers have triggered higher interest rates and commodity prices, causing value equities to rise while high-multiple growth stocks have underperformed or declined.
• Liz characterizes the current market position as approximately halfway through the rotation trade, with significant room remaining despite U.S. GDP growth peaking in the second quarter.
• Global growth dynamics are projected to peak in the third quarter, and commodities remain 62% below super cycle highs with a forecasted 10% increase over the next six months.
• Long-term interest rates remain at half the 2018 level, with the narrative surrounding Fed tapering expected to unfold over the coming six months.
• Strong economic data is anticipated from June through August, supporting the continuation of the value rotation.

Sector Performance and Valuation Dynamics

• Commodity-sensitive sectors (Energy, Materials) and "real economy" areas (Industrials, Consumer Discretionary) are benefiting from the rotation, currently comprising only 14% of the S&P 500 market cap.
• Technology is currently double the size of these traditional value sectors, though reclassification of giants like Amazon (Consumer Discretionary) and Google/Facebook (Communication) further skews the comparative baseline.
• Within the technology sector, high-duration stocks with inconsequential profits are among the worst performers, with some "stay-at-home" names down 40% from highs.
• Conversely, tech hardware (GDP-sensitive) and mega-cap tech with valuation support and buyback programs have demonstrated resilience and recent outperformance.
• Investor preference is shifting toward "growth at a reasonable price" (GARP) stocks with valuation anchors, moving away from high-multiple, unprofitable business models.

Risks to the Rotation and Retail Influence

• Potential triggers for unwinding the rotation include decelerating U.S. manufacturing (ISM data), unmet inflation expectations (expected >2% in the next 2-10 years), and positioning dynamics as value stocks develop long momentum.
• Global growth risks involve potential vaccine distribution issues, new variants, or the failure of the "rest of world" catch-up trade to materialize.
• Retail investors are active in both growth and value themes, having previously driven the reopening trade and short-squeezed value stocks.
• Retail activity in high-multiple tech has declined following the last stimulus check, potentially driven by a shift in focus to the real economy, new asset classes, or tax-driven capital gains realization.
• While retail activity may pressure specific high-multiple tech stocks or heavily shorted names, it is not expected to alter the macro balance between growth and value.

Forward-Looking Themes and Strategic Focus

• A key focus is identifying equity winners and losers regarding input cost inflation and wage renegotiations as workers reenter the workforce.
• The European and Emerging Market reopening trades are viewed as early-stage opportunities with significant catch-up potential compared to the largely played-out U.S. trade.
• The U.S. infrastructure plan is a major theme for the next six months, benefiting industrial and material stocks.
• The financing of the infrastructure package via higher corporate and foreign minimum taxes is expected to create distinct winners and losers among companies facing tax rate increases.