Third-quarter earnings season got off on the right foot with 11 companies in the S&P 500 reporting—9 beat earnings expectations while only 2 missed the mark. As advisors think about which factors should receive more emphasis at this time, especially when the general idea is that value is starting to supplant growth as a factor leader, some analysts are wary that value’s lead is sustainable.
Per a MarketWatch report, the trend of value overtaking growth “has been running out of steam during October — value has fallen 0.1% month-to-date versus growth’s 0.2% decline — helping instigate a debate over which factor will treat investors more kindly during the final quarter of 2019 and beyond.”
“Investors currently pay a record-high premium for stocks with stable earnings growth versus firms with volatile growth,” said Goldman Sachs analyst David Kostin. “But as economic activity slows, stocks with volatile growth tend to experience earnings weakness and falling valuations, and investors gravitate towards stocks with more stability.”
The first two quarters belonged to value, but as it starts to run out of steam, growth could push investors through 2020.
“In the first and second quarters of 2019, value saw modestly positive earnings growth while growth saw earnings shrink,” said Mike Wilson, chief U.S. equity strategist at Morgan Stanley. “Despite this, consensus is still very optimistic on growth’s earnings prospects in 2020.”
It might seem that after the extended bull run led by FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks, growth was no longer in vogue, but they’re still seeing buyers.
“Investors are still piled into growth names, hoping the earnings growth picture improves,” Wilson wrote. “However, both the last-twelve-month numbers and the next-twelve-month numbers suggest that growths earning’s superiority is on hold for now.”
Exchange-traded fund (ETF) investors who want to get on board the growth train can look to funds like the iShares Russell 2000 Growth ETF (IWF). IWF seeks to track the investment results of the Russell 1000® Growth Index, which measures the performance of large- and mid-capitalization growth sectors of the U.S. equity market.
IWF generally invests at least 90% of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index. It may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents, as well as in securities not included in the underlying index, but which the advisor believes will help the fund track the underlying index.
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