Equity prices are heating up. Is there still room to run?

by: , Portfolio Strategist, New York Life Investment Management

Last week, value stocks outperformed, relative to growth strategies, and exhibited the strongest positive skew in nearly a decade. The last time that the market was widening to this extent in value’s favor, the segment outperformed growth by more than 12% over 15 months (late 2015). A few days do not make a trend, but they do provide us an opportunity to highlight industries where we think value has room to run.

Value vs. growth

8/1/08 – 8/6/18

Sources: Thomson Reuters Datastream, New York Life Investments. Past performance is not indicative of future results. An investment cannot be made in an index.

Impressive earnings have supported equity prices in 2018, and increasing nominal GDP growth will likely continue to support prices. With so much upside potential behind us, which sectors will win or lose in the coming months?

Questionable calls: technology

Technology stocks, particularly the fabulous five (Facebook, Apple, Amazon, Netflix, and Google/Alphabet), have steadily outperformed the market in 2018, driven in part by their investments in productive capacity.

Tech performance

8/3/17 – 8/3/18

Sources: Thomson Reuters Datastream, New York Life Investments. Past performance is not indicative of future results. An investment cannot be made in an index.

However, Facebook’s disappointing earnings guidance began a retreat in this space that we think is overdue. In the coming months, we see several factors continuing to create headwinds for tech:

  • Limits to activity: Whether driven by regulation or by concerned consumers, changes to technology companies’ operating environments could increase costs and reduce advertising revenues. As public discussions about data privacy, consumer protection, and the impact of automation continue, skepticism over the sustainability of product models could reduce the attractiveness of some tech stocks.
  • Court action: Cases related to privacy breaches and anti-monopoly activity increase costs for tech stocks and increase potential reputation risk.
  • Competition: Tech companies focused on services such as streaming content or cloud data storage are beginning to encroach on one another’s territory. Companies will be faced with competitive pricing pressures, while also facing increasing talent costs, squeezing margins for their services.

Room to run: energy and financials

Other sectors boast storylines that would support higher future pricing. We continue to see energy as a top sector with room to run in the coming months. The fundamentals supporting oil prices are solid. On the demand side, a booming global economy increases demand for energy assets. On the supply side, companies slashed investment during the oil price downturn of 2014-2016. As previously finished projects slowly deplete, new supply now coming online is insufficient to fully satisfy that demand. What’s more, shale is limited in its capacity to act as swing supply, due to infrastructure development hurdles. Because of this tighter supply/demand dynamic, WTI prices are now well above $60/bbl, but we have yet to see a change in sentiment towards the energy sector. We believe this provides an opportunity for growth, and we anticipate that the price of stock in these companies will rerate to reflect that potential.

We also see opportunity in financial stocks. The Trump Administration has proven eager to let banks use capital more efficiently. Deregulation of capital requirements and oversight promise to reduce costs. Stronger economic activity and tax breaks should boost loan demand. We anticipate that strong economic growth will continue to contribute to banks’ earnings, increasing the potential for future outperformance. The price-to-book of financial firms should continue to accelerate in this environment.

S&P 500 financials price to book

8/3/04-8/1/18

Sources: Thomson Reuters Datastream, New York Life Investments. Past performance is not indicative of future results. An investment cannot be made in an index.

Value in store

In the aggregate, we see a strong economy contributing to sustained growth in equity prices. Despite the recent selloff in industries like technology, no significant “safety” trade (the purchase of utilities, gold, or bonds) has emerged. We believe that a targeted focus on value equities – particularly financials, energy, healthcare, and industrials – will improve investor returns in the quarters ahead.

Opinions expressed are current opinions as of the date appearing in this material only. The information and opinions contained herein are for general information use only. New York Life Investments does not guarantee their accuracy or completeness, nor does New York Life Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

About Risk

All investments are subject to market risk, including possible loss of principal. There is no assurance that the investment objectives mentioned will be met. Diversification cannot assure a profit or protect against loss in a declining market.

The Russell 1000 Index is an index of approximately 1,000 of the largest companies in the U.S. equity market. The Russell 1000 is a subset of the Russell 3000 Index. It represents the top companies by market capitalization. It is considered a bellwether index for large cap investing.

S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value and is one of the most common benchmarks for the broader U.S. equity markets.

New York Life Investments is a service mark and name under which New York Life Investment Management LLC does business. New York Life Investments, an indirect subsidiary of New York Life Insurance Company, New York, New York 10010, provides investment advisory products and services. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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Robert Serenbetz

Portfolio Strategist, New York Life Investment Management

Robert Serenbetz is the Portfolio Strategist with New York Life Investment Management’s Strategic Asset Allocation & Solutions (SAS) Group. He contributes to investment thought leadership and communication efforts across New York Life Investment Management

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