You can divide stocks into groups in a lot of different ways, such as by industry, market value, and style (growth or value). Jefferies experts wrote on Friday that growth would be better for investors than value in the first few months of Trump’s second term as president.
Companies whose stocks are considered “growth stocks” have seen big jumps in their sales and profits. Because they are growing, prices tend to move in their favour, and they sell at high prices compared to their earnings or book value. Companies that are already established and have slower growth rates tend to have value stocks. This is true for a lot of them. When compared to earnings or book value, they sell for less than growth stocks. Some value buyers pay a lot of attention to dividends.
If you look at the screen below of the S&P 500 Pure Growth Index, you can see which stocks analysts think will have the most growth over the next year, based on their average price targets.
As proof that growth would win out in the early stages of Trump’s second term, Desh Peramunetilleke, global head of quantitative strategy at Jefferies, made the following points:
- He expects a repeat of Trump’s first term, which he called “a tale of two halves, with Growth doing well in the early stages, while the rest was dominated by Quality and Low-risk.”
- With U.S. economic growth “normalizing,” he expects growth stocks to “outshine cyclicals.” To this he added: “Lower global trade growth and a cap on oil prices is likely to be a drag on commodities, cyclicals and Value.”
- “Growth stocks are trading at [roughly a] 20% discount to the 5-year peak relative PE,” he wrote.
- Recent revisions of consensus sales or earnings estimates for companies in the growth camp have been better than those in the value group.
Value and growth rates
We could start with the S&P 500 Growth Index to look for growth stocks in the S&P 500 SPX 0.56%. The indexes talked about in this piece are all managed by S&P Dow Jones Indices.
S&P keeps up a number of style indexes that group stocks by growth or value styles in different ways. You can read about how the company makes its lists here.
Every business in the S&P 500 gets a growth score and a value score once a year.
The growth score is made up of:
- Three-year change in earnings per share EPS), divided by current price.
- Three-year sales-per-share growth rate.
- Momentum, as represented by the 12-month price change.
Ratios of book value, EPS, and sales to price make up the value number.
Based on S&P’s method, this means that about 34% of the stocks are in a “blended basket” that has “neither pure growth nor pure value characteristics.” Because of this and the way the weights are calculated, there are currently 233 companies in the S&P 500 Growth Index and 437 in the value index. More than one hundred stocks are in both benchmarks.
Going over the S&P 500 Pure Growth Index
S&P Dow Jones Indices also keeps “pure” style indexes that don’t cross with each other. These are weighted by style scores instead of market capitalisation.
The S&P 500 Pure Growth Index is made up of 66 stocks. A share of the Invesco S&P 500 Pure Growth ETF RPG 0.82% is one way to invest in them all at once. This chart shows how the price of the S&P 500 Pure Growth Index has changed over the past five years compared to the price of the S&P 500 Pure Value Index. This goes back to Peramunetilleke’s point that growth stocks are selling well below their peak valuation compared to value stocks.
