Over the past few weeks there has been a sharp reversal of September’s Value factor leadership. Growth outperformance can in part be attributed to the rally in Tech shares, but Growth has also outperformed Value on a sector-neutral basis (charted below). From the early October Peak, Value has fallen -2.7% relative to Growth. Yesterday, Value staged a modest rebound that we expect to continue.
Value’s lackluster performance remains an outlier relative to overall market trends. Cyclicals have led sector level internals and Treasuries, the classic safety trade, have fallen, pushing the 10yr yield back towards its 2021 high. Currently, Value/Growth performance is in its 5th percentile relative to bond yields. With growth firm, earnings strong, seasonality a tailwind, and sentiment improving, a rebound in Value, particularly those levered to yields and the economic cycle, should be expected into year end.
The Growth rotation has been helped by ongoing supply chain issues and increasing COVID risk associated with the Delta Plus variant. Case growth had been moving lower globally, but just bottomed as infections across Europe and Asia began rising again.
COVID fears, along with general slowdown concerns, have not hampered the S&P, which has rallied 5% in October, or Cyclicals, which continue to outperform Defensives. 10yr yields have had a loose relationship with COVID sentiment trends since the start of the pandemic. During the recent downtick in pandemic sentiment, measured using the Amenity natural language processing tool, yields have continued to move higher.
Strong fundamentals have helped fuel risk appetites. So far in 3Q S&P earning reporting season, 88% of companies are beating analyst expectations (historical average is 76%). The average beat has been 16pp. Margins were expected to be about 13% and are running closer to 14%. Those trends help explain the recent rebound in investor sentiment, which had fallen over the summer and through September.
In the table below we highlight the S&P Value stocks with the highest correlation to changes in the 10yr yield. We further narrowed the list by filtering for Cyclical stocks. These names are well positioned as yields trend higher and investors positions for a rebound in growth over the coming quarters.
