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Growth Stocks Thrive During Economic Weakness

But with recession worries still swirling, many fear the rally is unsustainable. Based on history, growth is where you want to bet.

Growth Stocks Beat Value Stocks When Growth is Scarce

Let’s cover 5 feathers in the growth-tilted bull camp.

  • Fed tightening has slowed inflation but it’s also slowing the economy. Meanwhile, the timing of Fed rate cuts remains murky. That, coupled with tightening credit from ongoing regional bank stress, has recession worries topping investors’ worry list.

  • The Bloomberg consensus forecasts only 1.2% 2023 US real GDP growth and a lackluster 0.8% in 2024.

  • When growth is scarce, investors pay up for it. Back to 1980, growth has always outperformed value when US real GDP growth has been less than 2%. Growth stocks posted their biggest gains when US real GDP growth has been sub 0.5%.

  • Valuations aren’t terrible: The S&P 500 Growth Index trades at 26% premium to the S&P 500 Value Index, nearly in line with its 22% 20-year average valuation premium.

  • Value stocks are very sensitive to the economy. Value tends to lead early in the economic cycle, coming out of a recession when growth is re-accelerating. With growth slowing and recession fears fueled, it’s still early to own value.

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The following chart shows why growth stocks are a great bet when GDP is 2% or less:

Source: www.mapsignals.com
Source: www.mapsignals.com

Sectors For Growth Investing

Analyzing the sector weights of the S&P 500 Growth and Value indices is a great way to grasp exposures.

There are major differences, especially with Technology.

The S&P 500 Growth Index has a monster 34% allocation to tech – that’s double the 17% of the value index.

Next, health care represents 19% of the growth bucket, double value’s 9.5%. Energy is the other big outlier in the growth index at 7% vs. sub 2% in value.

On the flip side, notice growth’s big underweights relative to value. Financials represent a skimpy 7% vs. 20% in the value index.

Source: www.mapsignals.com
Source: www.mapsignals.com

Growth’s sector DNA is positioned for continued strength. High-quality stocks are dependable when the economy hits the skids.

The Growth Index has large 44% weighting to mega-cap names in the Technology and Discretionary space like: Apple (AAPL), Microsoft (MSFT), NVIDIA (NVDA), Home Depot (HD), Starbucks (SBUX), NIKE (NIKE), and Amazon (AMZN)

This lines up well with the MAPsignals sector leaders with Discretionary (XLY) and Technology (XLK) ranked highest all year:

Focus on quality and best of breed stocks during a challenging economic climate.

The Bottom Line & Explanatory Video

Bet on growth stock when the economy is weak. A sub 2% GDP reading favors high-quality names which can add ballast to your portfolio.

For a deeper dive on this writeup, you can read the longer version here.

Disclosure: the author holds no position in XLK, XLY, AAPL, NVDA, & AMZN at the time of publication. He does hold long positions in MSFT, NKE, HD, & SBUX in personal and managed accounts at the time of publication.

Learn more about the MAPsignals process here.

This article was originally posted on FX Empire

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