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June 13th, 2024

Will Growth Stocks Continue to Outperform?

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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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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

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This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

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Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

It is not possible to invest directly in an index. Investors pursuing a strategy similar to an index may experience higher or lower returns, which will be reduced by fees and expenses.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.

The Russell 1000 Growth Index is a well-known, unmanaged index of the prices of 1000 large-company growth common stocks selected by Russell. The Russell 1000 Growth Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

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Returns for each strategy and the corresponding Morningstar Universe reflect the annualized returns for the periods indicated. The Morningstar Universes used for comparative analysis are constructed by Morningstar (median performance) and data is provided to Zacks by Zephyr Style Advisor. The percentile ranking for each Zacks Strategy is based on the gross comparison for Zacks Strategies vs. the indicated universe rounded up to the nearest whole percentile. Other managers included in universe by Morningstar may exhibit style drift when compared to Zacks Investment Management portfolio. Neither Zacks Investment Management nor Zacks Investment Research has any affiliation with Morningstar. Neither Zacks Investment Management nor Zacks Investment Research had any influence of the process Morningstar used to determine this ranking.

The Russell 1000 Value Index is a well-known, unmanaged index of the prices of 1000 large-company value common stocks selected by Russell. The Russell 1000 Value Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.
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