Worried the recent pullback in growth stocks means the party is over for some of this year’s best investment bets? Citigroup Inc. says you needn’t be.
A stalwart investment style — the practice of favoring so-called growth stocks, such as technology companies, over value shares like energy producers and banks — is under scrutiny after losses in flagship growth plays from Apple Inc. to Facebook Inc.
But while the run up in growth equities has seen prices relative to value become stretched for U.S. stocks, the valuations are still “trivial” compared with the highs reached during the tech boom of the late 1990s, according to Citigroup’s global strategy team.
The largest technology stocks have returned about triple the S&P 500 Index in 2017, spurring concern investors may be overpaying for the shares. While some may be tempted to pivot to value equities, Citigroup says the latter will only make a comeback if bond yields climb along with a recovery in oil prices. The bank’s bond forecasters expect 10-year Treasury yields to remain around current levels by the end of this year, putting them well below the market consensus for them to rise to 2.68 percent in that period.
Value enjoyed a brief renaissance in the final two months of 2016 after Donald Trump’s shock election victory spurred hopes of a stronger economy with tax concessions for businesses. That momentum quickly eased as investors pared back their optimism this year and U.S. bonds climbed as worries about the sagging outlook for inflation dominated.
The eight-year long bull market in U.S. stocks is the second longest in history. Citigroup’s strategists, led by London-based Chief Global Equity Strategist Robert Buckland, say it’s been driven by outperformance in growth stocks and that, over the past 20 years, there has never been a shift in leadership between the two strategies until after a bull market is over.
“That might imply that growth outperformance will not finish until this bull market ends,” Buckland wrote in the June 22 report.
Here are some other key takeaways on Citigroup’s analysis:
- U.S. and European growth stocks look expensive; In the U.S., value is also expensive.
- Cheap value stocks can be found in emerging markets.
- The U.K. is the only region where growth is cheap.
- Current price-to-book ratio for U.S. growth stocks is five times, compared with a multiple of 17 during the late 1990s.