Goldman Sachs says steer clear of pure growth or pure value

Tightening financial conditions and the possibility that the economy slows too much and dips into a recession is a reason for investors to opt for stability, Goldman Sachs says.

“In the current, angst-ridden equity investment environment, we believe Stability represents a more attractive attribute than either Growth or Value,” strategist David Kostin and team wrote in a note Sunday. “Stocks with stable growth and low share price volatility typically outperform as GDP slows and (the financial conditions index) tightens but currently trade at undemanding valuations.”

Sectors dominated by growth stocks include Info Tech (XLK), Consumer Discretionary (XLY) and Communication Services (XLC). Value-dominated sectors include Financials (XLF), Industrials (XLI), Energy (XLE) and Consumer Staples (XLP).

The Growth vs. Value trade will trade sideways for the rest of 2022, Kostin said.

“The resumption of sustained Growth stock outperformance will require investors to gain confidence that the economy will slow but avoid a recession and that inflation will soften enough to reduce the need for dramatic further FCI tightening,” he dded. “Such and outcome is possible but equity investors are skeptical the Fed can achieve these objectives without causing a recession in 2023. Growth stocks will struggle to outperform until the uncertainty diminishes.”

Struggles in the Growth vs. Value trade raises concerns about broader market performance.

“The correlation of Growth vs. Value with the S&P 500 (SP500) (NYSEARCA:SPY) during the last three months has been the strongest in 20 years outside of the 2001 Tech Bubble unwind,” Kostin said. “This correlation can likely be explained by the large weights of Growth stocks in the S&P 500, the current popularity of Growth stocks among many investors, and the importance of Fed policy and interest rates in driving both Growth/Value rotations and overall equity market returns.”

SA contributor Deep Value Ideas said Netflix was wrongly valued as a growth stock.