Our U.S. equity strategists argue that the parabolic rise in the growth vs. value trade has run its course and is no longer sustainable.
The bulk of our style Indicators shown in the chart above signal that macro conditions are still tilted in favor of growth. As a reminder, growth indexes almost always move to a premium when economic growth declines, as is currently the case.
Perhaps the most powerful tailwinds for the growth bias relate to the deflationary backdrop. Growth indices have a better track record than value indexes when pricing power is ebbing. Even then, our relative pricing power proxy is soaring, further reinforcing that growth stocks have a meaningful profit advantage.
Growth margins are consistently higher and have less cyclicality than those of value firms, underscoring that when overall sales are pressured, growth earnings should be more stable. The latter explains why the growth vs. value price ratio is positively correlated with broad market volatility. With the VIX index moving sharply higher, it is no wonder that the share price ratio has gone vertical.
Nonetheless, our U.S. equity strategists are losing conviction in the ability of growth stocks to sustainably outperform from current levels, despite our downbeat view of global economic growth prospects. Please see the next Insight, (Part II) U.S. Equities: Does It Still Make Sense To Favor Growth Over Value?