The S&P 500 has raced higher this quarter and one group of stocks has done the heavy lifting.
Growth stocks, prized for high sales and profit potential, have led the market higher since the December bottom.
Lindsey Bell, investment strategist at CFRA Research, said this is just the beginning of a bigger trend.
“Growth is going to continue to lead as [economic] growth picks up as the year carries on and I think that’s because you’ve seen these stocks hit down a lot worse than some of the other areas of the market so they have a lot further to go from there,” Bell said Thursday on CNBC’s “Trading Nation.”
Stocks with high-growth potential, such as the tech names, typically get a bid when the economy is strong as investors are more willing to pay a higher price for a bigger payoff. During a downturn, investors tend to hide out in value stocks which have lower valuations and more consistent profits.
As fears of an economic slowdown rose over the fourth quarter, both value and growth stocks were punished; the IVE value ETF plummeted 13 percent, while the IVW growth ETF saw a sharper 15 percent decline.
A low bar for earnings after the December sell-off could also be a catalyst for growth stocks, according to Bell.
“Earnings numbers have been cut drastically for these guys, way more than the S&P 500, way more than the value stocks so I think there just lies opportunity there when we do get that economic growth back,” said Bell.
The Street anticipates earnings for growth stocks to fall by 0.6 percent this year, said Bell, far worse than initial expectations for an increase of 7.6 percent. By comparison, value earnings growth was reduced to 4.4 percent growth from 7.5 percent.
While money has flowed back into growth stocks after December’s sell-off, Bell fears some investors may have been left out. ETF funds, a passive investment vehicle often used by individual investors, have shown flows into value indexes over growth since mid-2018.
“They’re getting a little more nervous,” Bell said of investor sentiment. “It’s the later stages of this business cycle, we’re in the 10th year of the bull market and they’re just being a little more cautious with the uncertainties that still remain out there.”
However, even if a recession was on the horizon, historical returns suggest growth stocks still deliver.
“Investors should consider the growth area of the spectrum because what you typically see over time is in the six months before, during and after a bear market or correction growth typically leads,” said Bell.
During the last correction from May 2015 to February 2016, the S&P 500 declined by 14 percent. Over the next six months, the IVW growth ETF rallied 19 percent.