Growth Stocks’ Leadership Will Be Short-Lived, Ned Davis Predicts

Growth stocks are leading value this year, but that will not last long, according to Ned Davis Research. That long-expected recession—when it finally hits—and the currently upward-trending interest rates tend to favor value, two of the firm’s leading savants said in a webinar.

“The next several years will be more about value,” said Ed Clissold, chief U.S. strategist at Ned Davis. He pointed to long stretches of time over the past 30 years when value outpaced growth, although sometimes the two were close.

Thus far this year, the S&P 500 growth index has returned 11.2%, and its value counterpart just 4.5%. Tech stocks, the top dogs among growth sectors, sank badly last year but are up by one-third in 2023. In snake-bitten 2022, the growth gauge fell far more than the value one, negative 29.5% versus minus 5.4%.

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Recessions tend to favor value, which often has a more defensive character, Clissold said. “The [next] recession, which keeps getting pushed out, is value’s best chance” to regain the lead over growth, he argued. Coming out of a recession, value should shine with more-quickly-rising earnings, as history has shown, he declared.

Plus other outside factors, such as deglobalization, should hobble growth up ahead, added Rob Anderson, Ned Davis’ U.S. sector strategist. The reason: Expansion overseas, where tech and other growth sectors have thrived, will be narrowed.

Clissold noted that growth’s 2023 rebound, which surpasses value, ended the second-shortest period of value supremacy since tracking began in 1930. The shortest one followed the 1991 Gulf War, a brief conflict that quickly escalated oil prices—energy is a value sector—only for them to deflate with Iraq’s sudden defeat.

One recent oddity is that some tech-oriented growth stocks got hit so badly last year that, despite their 2023 comeback, they are classified as value plays: notably Microsoft, Meta Platforms and Amazon. Meanwhile, Exxon Mobil, a longtime value name as an energy stock, is currently listed in the growth category. “Sector makeups can change pretty quickly” nowadays, Anderson remarked.