Jason C. from Fairfax, VA asks: Hello Mitch, my question is about growth stocks in 2024, and whether you think 2023’s outperformance streak can continue. With interest rates and inflation seeming to be stubborn, would that not potentially create headwinds for the growth category? Thank you for your time.
Mitch’s Response:
Thanks for emailing, Jason. The short answer to your question is that growth stocks have already demonstrated that they can continue to outperform, even given expectations for higher-for-longer interest rates.1
If you look at the year-to-date performance of the Russell 1000 Growth Index, the S&P 500, and the Russell 1000 Value Index, it’s plain to see that growth stocks have been leading by a fairly significant margin.
You’re correct to point out that higher rates could pose headwinds for growth companies since in many cases the appeal of growth companies is the promise of higher future cash flows. The expectation of ‘higher-for-longer’ interest rates can sap the present value of those future cash flows, and lower the premium that investors are willing to pay for them.
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But there are a couple of reasons I think growth stocks can remain attractive in the current environment. For one, the U.S. economy has demonstrated – at least for now – that it can absorb the impact of higher interest rates. Economic growth accelerated at the end of last year, and we’ve continued to see steady GDP growth in 2024, with few signs of a recession. Estimates for the full-year of 2024 economic growth have risen from 1.3% in January to 2.4% as of the end of May.
Less-rate volatility is another reason I see a constructive environment for growth stocks. Looking back at 2022, we know that 10-year U.S. Treasury bond yields surged from 1.5% at the beginning of the year to 4.5% by October of that year. Growth stocks got pummeled. I do not see much indication that yields will surge or be nearly as volatile in 2024. The 10-year is up approximately 50 basis points since the beginning of the year, which puts it back to levels seen last fall. Rate volatility has been fairly subdued.
The Federal Reserve has been non-committal on rate cuts for 2024, but many investors including myself are convinced that rates will not move higher in this cycle. This assumption bodes well for growth stocks, given the expectation that rates will be lower in the future than they are today. It should also be noted that growth stocks, especially the tech giants, have some of the strongest balance sheets in the market and have exposure to many secular trends that we’re seeing today, like gains in artificial intelligence. If the economy continues to grow and some of these themes mature, growth stocks can continue to perform well—even if interest rates do not come down significantly in the next year or two, in my view.
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Disclosure
1 Black Rock. May 20, 2024. https://www.blackrock.com/us/individual/insights/growth-stocks-resilience
2 Zacks Investment Management reserves the right to amend the terms or rescind our free The Do’s and Don’ts of Stock Market Volatility offer at any time and for any reason at its discretion.
3 Zacks Investment Management reserves the right to amend the terms or rescind our free The Do’s and Don’ts of Stock Market Volatility offer at any time and for any reason at its discretion.
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