- The rally in growth stocks is not over yet, and that should stimulate a sustained stock rally into the end of the year, according to JPMorgan.
- The bank said the key to the continued performance of growth stocks is a decline in long-term bond yields.
- “We think the tactical recovery to growth has a bit more legwork as bond yields are likely to stall,” JPMorgan said.
The current stock market rally has more room to head into the end of the year, and will be driven by the continued surge in growth stocks, JPMorgan said in a note Monday.
The company recommends a tactical overweight for growth stocks over value stocks, and sees no reason to change its stance as long as bond yields continue to fall, or at least remain subdued.
“We think the tactical pick-up in the growth style has a bit more leg up as bond yields are likely to remain stalled,” said JPMorgan’s Mislav Matejka, adding that a 100 basis point drop in long-term bond yields was the first catalyst for the recent rise in bond yields. the growth stocks.
The reason bond yields are unlikely to rise decisively in the near term is because the gap between inflation expectations and bond yields has narrowed. “This will constrain bond yields in the near term,” said JPMorgan
In order for value stocks to outperform growth again, a few things need to happen, according to the note.
1. A new deepening of the 10-year/20-year yield curve.
“The US 10-to-2-year yield curve is currently completely inverted. We don’t think one should switch back to value before the yield curve steepens again,” Matejka said. “Curve steepening is usually necessary to lead a number of value sectors, including financial institutions.”
A steepening of the yield curve again would cause long-term interest rates to rise and short-term rates to fall, so that longer-term bond yields are higher than short-term yields.
2. Strong economic data.
“Stronger economic data is generally beneficial for value sectors, including financials. We don’t see macro data strengthening before the fourth quarter,” Matejka said.
3. Solid dynamics in Chinese activity.
“We should see stronger China momentum as most value sectors are linked to Chinese activity. China’s M1 and credit momentum has gotten higher, but that has yet to translate into better PMIs,” said Matejka. Recent data showed that the Chinese economy experienced a surprising slowdown in July.
Since there are no signs of the above three factors changing in the near term, this is not the time to dump growth stocks, according to JPMorgan, as the troubled sectors still have room for more upside at the end of the year and could drive the stock market up. .
And if value stocks regain their footing against growth stocks, that doesn’t mean the stock market is headed for another decline, as value stocks recently outperformed the market’s first sell-off. Instead, Matejka sees potential for value stocks to outperform growth amid broader upward movement in the market.
“We think value leadership in a down market is more of an anomaly than [the] norm… if the trade-off between growth and policy improves by the end of the year, value could lead again, but this time in a rising market,” concluded Matejka.