MacroResearchBoard

The equity market favorite of the last decade has remained relatively hot so far this decade, with the U.S. tech sector, particularly large-caps, remaining market leaders. The macro backdrop of weak overall corporate profits and low bond yields have benefited these shares, especially during the COVID-19 pandemic and now the tremendous uncertainty about the economic outlook.

However, a just-published report highlighted that positioning, momentum and valuations for this sector are all approaching previous growth-stock bubble extremes. A setback in the relative performance of growth stocks is inevitable, although a sustained rotation into value stocks hinges on a meaningful improvement in the economic and earnings outlook, which is far from imminent.

Still, investors should be increasingly selective in allocating to growth sectors, while hedging these positions with some offsetting exposure to value equities. Our recommended sector positioning is currently style agnostic, favoring the communication services sector for growth, financials for value, and health care stocks for a combination of both styles.