Goldman Sachs says value stocks will outperform in the near term — but growth stocks will take the lead by end of 2021

New York Stock Exchange floorAP Photo/Richard Drew

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The rotation into value stocks spurred by the global economic recovery is mostly over, but investors should expect near-term outperformance of value names before growth stocks regain market leadership by the end of 2021, according to Goldman Sachs.

"History, valuations, positioning, and economic deceleration indicate that most of the rotation is behind us," Goldman analysts led by Ben Snider said in a recent note. 

Following a long period of outperformance, growth stocks have recently taken a back seat to value stocks, which have soared as investors position for the economic recovery from the COVID-19 crisis. How much further the "growth unwind" lasts is among the most common questions the bank fields from clients, the analysts wrote.

While strong GDP growth and rising interest rates point to further outperformance of value stocks in the near term, growth will regain leadership in late 2021 or early 2022. The recent stretch of underperformance of growth stock already ranks among the largest in magnitude tracked by the bank. 

But there will still be a back and forth at play, and investors should be aware that other periods of rotation may not provide a blueprint for how long the rotation into value stocks lasts. 

"Until the market has conviction about whether recent inflationary pressures are 'transitory' it seems likely that the Growth vs. Value trade will remain volatile," they said.

Meanwhile, Goldman Sachs has an answer for investors torn between growth and value stocks amid the reopening of the global economy: invest in GARP, or growth at a reasonable price. 

GARP is a hybrid of the two investment themes. It is an approach the bank says investors can use to capture what remains of the rotation into value stocks while making sure they are well positioned for further gains among growth names. 

Recent inflationary pressures continue to cause some anxiety among investors as the Federal Reserve continues to stand by its current policy stance of unchanged interest rates even as data shows prices increasing.

Goldman Sachs screened S&P 500 companies that rank in the top 20% of their sectors based on growth, but do not rank in both the top or bottom 20% of their sectors on Value.

These median stocks, they concluded, trade at a similar valuation to the median S&P 500 stock but are estimated to post higher 2022 sales, earnings-per-share growth, and lofty long-term growth rate.

 

GARP stocks by Goldman Sachs - top 20Goldman Sachs Global Investment Research

Investors may have grown accustomed to growth stocks outperforming value, but since November 2020, the Russell 1000 Growth index has lagged behind the Value index by 20 percentage points.

"Our sector-neutral factors have rotated by nearly 40 percentage points," the analysts said. "But the trade has stalled in the past few weeks as interest rates have receded."

Russell 1000 growth vs valueFactSet, Goldman Sachs Global Investment Research

 

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