Great Expectations?

This document is directed at investment professionals and qualified investors (as defined by MiFID/FCA regulations).

Investors have been enthusiastic about economic recovery plays including many value equities, but is too much optimism baked into these stock prices?

The data shows that investors may have great expectations for this segment of the market, while those companies that continue to grow year in and year out are less in favor.

Performance vs. Fundamentals Year to Date

• Year to date, value stocks, which tend to have more exposure and leverage to the economy, have outperformed growth stocks, which are generally driven by more secular forces, independent of the economic cycle, such as e-commerce or digital payments.
• Much of the appreciation in value indices is based on expectations of a revenue and earnings snap-back as the economy recovers from the pandemic. Estimates have been rising for value stocks as a result of the gradual return to normalcy in the economy, but it may surprise investors that revenue estimates have actually been growing faster for the Russell 3000 Growth Index than the Russell 3000 Value Index.
• In the market’s view, many companies that experienced large revenue and profit declines may see improvements in their fundamentals in the coming months. With that now reflected in stock prices to some degree, investors are left to ponder what comes next. When we consider the next five years, we see slower economic growth but faster secular change driven by innovation, an environment we believe is well-suited to growth stocks.