Northern Trust Asset Management deputy chief investment officer and head of global equities Michael Hunstad thinks the S&P 500 and the Magnificent Seven growth and technology stocks that drove its surge have too high multiples. He noted Tesla's (TSLA.O) nearly 20% loss this year as an example of how quickly such equities might flip.
“We expect to see greater risk to the downside for multiples, particularly among the Mag 7," said Hunstad, who has been adding value-focused positions in healthcare and energy.
Since value equities have shorter cash flows and are less susceptible to borrowing costs, Hunstad thinks they could survive a prolonged period of high interest rates better than growth stocks.
Investors expect the Fed to lower rates this year, but they have trimmed their estimates for how quickly and deeply. A stronger-than-expected economy might spark inflation if monetary policy eases too soon.
Next week's congressional hearing from Fed Chairman Jerome Powell may illuminate policymakers' perspectives. Investors await U.S. employment statistics next Friday. Over the past decade, blistering rises in Apple (AAPL.O), Google-parent Alphabet (GOOGL.O), and Meta Platforms (META.O) shares have made betting against growth firms risky. Over the past decade, the S&P 500 Value index has gained 110%, while the Growth index has gained 235%.
Some measures show a decline in value sentiment. A net 13% of fund managers polled by BofA Global Research predict growth equities to outperform value names next year, the highest percentage since May 2020. However, other strategists believe AI's productivity increases could favor value and growth stocks in the long run.
Robotti & Company chief investment officer Robert Robotti expects value stocks to benefit most from AI, increasing margins and valuations. As a result, he bought more industrial and healthcare equities.
"The application of AI is going to be across the entire company and that’s not limited to the guy selling the chip," Robotti. Buying the chip and improving efficiency benefits the guy.
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