US Growth Equities

An Altered Investment Backdrop for U.S. Growth Equities

Portfolio Manager Jeremiah Buckley explains how higher rates and persistent inflation will impact U.S. growth equities.

KEY TAKEAWAYS

  • A sea change in monetary policy prompted by stubborn inflation has significantly altered a long-standing, benign investment backdrop for growth stocks.
  • We think that we are now close to a peak in inflation and that interest rates can begin to stabilize. If so, we believe that multiple compression is largely behind us and equities can begin to perform in-line with earnings growth again.
  • Elevated volatility can provide opportunity as some of the current macro headwinds abate and we return to a more stable period of economic growth.

KEY TAKEAWAYS

  • A sea change in monetary policy prompted by stubborn inflation has significantly altered a long-standing, benign investment backdrop for growth stocks.
  • We think that we are now close to a peak in inflation and that interest rates can begin to stabilize. If so, we believe that multiple compression is largely behind us and equities can begin to perform in-line with earnings growth again.
  • Elevated volatility can provide opportunity as some of the current macro headwinds abate and we return to a more stable period of economic growth.

Investors began to digest the Federal Reserve’s (Fed) intentions to tighten monetary policy in November of last year, amid a market that had been climbing steadily since early in the pandemic. In the months since, we have seen persistently high inflation, and the central bank has now emphatically pivoted from extraordinarily supportive policy to aggressive tightening. Today, we are faced with a fundamentally changed environment ‒ higher rates and lingering inflation present a stark contrast to the low-rate, low-inflation environment of the previous decade ‒ forcing investors to reconsider equity growth prospects and valuations.

U.S. equity markets have sunk close to bear market territory, with the S&P 500® Index recently off nearly 18% from its record high on the first trading day of 2022 (as of 18 May 2022). Inflation readings this year have been higher and more durable than many expected. Until inflation moderates and interest rates can stabilize, volatility is likely to continue as the impacts to economic growth ‒ both short and long term ‒ remain uncertain.

The outlook for inflation

Some signals at both the macro and company levels lead us to believe we are close to a peak in inflation. Strong demand for goods ‒ supported by robust consumer balance sheets ‒ is moderating as growth pulled forward during the pandemic slows and government stimulus wanes. Higher financing costs due to rising rates and a shift back to spending on services, which has been limited due to the pandemic, are also pushing down demand for goods.

On the supply side, labor force participation, although slightly lower in April, has generally trended toward pre-pandemic levels, easing some pressure in an historically tight labor market.

Figure 1: Labor force participation rate

Equity chart 1

Source: U.S. Bureau of Labor Statistics, as of 18 May 2022.

Retailers have rebuilt inventory levels, leading to less product scarcity, which will likely cause some discounting and lower prices in some categories. The supply chain for semiconductors, which have been a problematic segment of the market, is slowly improving, and we expect more material improvement in 2023 as new capacity is added across the industry. We are also seeing transportation costs moderate as capacity catches up and demand levels off. Despite these positive developments, commodity prices continue to rise, a situation that has only been worsened by the war in Ukraine and that is not being offset by increased production elsewhere.

Near-term equity impacts

If our base case of peak inflation and more stable interest rates proves correct, we believe multiple compression is largely behind us and that equities can start to perform in line with earnings growth again. Given a volatile environment simultaneously impacted by the pandemic, shifting fiscal and monetary policy and geopolitical conflict, we recognize that it has been difficult for companies to plan effectively. However, we believe businesses can adjust and will seek to optimize their cost structures and investments to ultimately increase productivity and margins.

Long-term equity impacts

In the longer term, we believe that innovation will continue to spur earnings growth and lead to capital appreciation in equities. Products and services such as cloud computing and software that are driving productivity gains and tend to have a deflationary effect in the economy will create value for customers and the companies that provide them. As the need grows to process data for technologies such as artificial intelligence, semiconductor demand will remain high. Semiconductors will also be vital as they proliferate across the economy and in our daily lives ‒ in cars, machinery, devices and other applications. Continued innovation in the health care sector can likewise create value by improving patients’ lives and lowering the overall costs of the health care system. So, while a structurally higher interest rate environment will make it necessary to re-examine allocations, we believe that long-term investment themes will remain instrumental to growth in equities.

Digging deeper into value vs. growth

Rather than view the investment world from a broad value versus growth perspective, we prefer to drill down deeper into sectors, industries and companies to determine that outlook. Some of the sectors and industries that tend to be more heavily weighted in value indices include energy, banks, consumer staples, pharmaceuticals and utilities.

Figure 2: YTD returns, S&P 500 sectors and sub-industries

Equity Chart 2

Source: Bloomberg, as of 18 May 2022.

The energy sector has been the clear winner this year as prices of oil and natural gas have skyrocketed. On the other hand, while banks have been the worst-performing sector of this group, we have seen improvement in loan demand and believe the current interest rate environment should continue to bolster net interest margins. Capital market exposure has dragged down performance for many banks recently, but it is our belief that this will eventually stabilize.

Consumer staples and pharmaceuticals tend to perform well in uncertain and inflationary times like the present. However, these sectors have seen significant multiple expansion as investors have exited risky investments and bought into more defensive areas of the market. Rising commodity costs may eventually pressure these companies’ ability to continue raising prices as consumers will choose to trade down, and there continues to be concern about government-influenced price deflation in pharmaceuticals.

In the past, commodity industries were generally not attractive to us due to the low returns on capital these companies were earning. However, greater restrictions on supply growth and better capital discipline by company management have changed the outlook to some extent. While we don’t believe it is prudent to chase short-term supply chain disruptions, the long-term supply and demand environment may now be conducive to higher returns on capital.

Opportunity in volatility

While markets can be uncomfortable and confusing at times such as these, elevated volatility can also create opportunity. We are now seeing attractive entry points in high-quality companies generating cash flows with attractive long-term secular growth. In our view, this environment reinforces the importance of focusing on equities with robust balance sheets and consistent cash flows that can reinvest during uncertain periods. We think these companies can emerge in a position of strength and accelerate market share gains as some of the current macro headwinds abate and we return to a more stable period of economic growth.

Read more on these topics

Este documento recoge las opiniones expresadas por el autor en el momento de su publicación y podrían ser diferentes de las de otras personas/equipos de Janus Henderson Investors. Cualquier instrumento, fondo, sector e índice citados en este artículo no constituyen ni forman parte de ninguna oferta o solicitud para comprar o vender alguno de ellos.

 

La rentabilidad histórica no predice las rentabilidades futuras. Todas las cifras de rentabilidad incluyen tanto los aumentos de las rentas como las plusvalías y las pérdidas, pero no refleja las comisiones actuales ni otros gastos del fondo.

 

La información contenida en el presente artículo no constituye una recomendación de inversion.

 

Comunicación Publicitaria.

 

Glosario

 

 

 

Important information

Please read the following important information regarding funds related to this article.

Janus Henderson Capital Funds Plc es un OICVM constituido conforme a las leyes de Irlanda, con responsabilidad segregada entre sus fondos. Se advierte a los inversores de que solo deberán realizar inversiones basándose en el Folleto más reciente, que contiene información acerca de las comisiones, gastos y riesgos aplicables. Esta es una comunicación con fines de promoción comercial. Antes de tomar cualquier decisión de inversión definitiva, consulte el folleto del OICVM y el documento de datos fundamentales para el inversor. Este documento puede obtenerse de los distribuidores y agentes de pago/agente de servicios, y deberá leerse con atención. La tasa de rentabilidad puede variar y el valor del capital de una inversión fluctuará debido a las fluctuaciones que experimenta el mercado y el tipo de cambio. Las acciones, si se reembolsan, pueden tener un valor superior o inferior a su coste inicial. La información contenida en este documento se facilita como referencia y no puede interpretarse como una oferta, invitación, recomendación o asesoramiento de inversión, ni debe tomarse como base para tomar (o dejar de tomar) una decisión. Janus Henderson Investors Europe S.A. puede decidir dar por finalizados los acuerdos de comercialización de este organismo de inversión colectiva atendiendo a lo dispuesto en la regulación pertinente.
    Specific risks
  • Las acciones/participaciones pueden perder valor con rapidez y, por lo general, implican un mayor riesgo que los bonos o los instrumentos del mercado monetario. Como resultado, el valor de su inversión puede bajar.
  • Un emisor de un bono (o instrumento del mercado monetario) puede verse imposibilitado o no estar dispuesto a pagar intereses o reembolsar capital al Fondo. Si esto sucede o el mercado percibe que esto puede suceder, el valor del bono caerá.
  • Cuando los tipos de interés aumentan (o descienden), los precios de valores diferentes pueden verse afectados de manera diferente. En particular, los valores de bonos suelen descender cuando los tipos de interés aumentan. Este riesgo suele ser mayor cuanto mayor sea el vencimiento de una inversión en bonos.
  • El Fondo invierte en bonos de alto rendimiento (sin grado de inversión) y, si bien éstos suelen ofrecer tipos de interés más altos que los bonos de grado de inversión, son más especulativos y más sensibles a los cambios adversos en las condiciones del mercado.
  • Si un Fondo tiene una gran exposición a un país o una región geográfica en concreto, lleva un nivel más alto de riesgo que un fondo que está mucho más diversificado.
  • El Fondo podrá utilizar derivados con el fin de alcanzar su objetivo de inversión. Esto puede resultar en un "apalancamiento", que puede magnificar el resultado de una inversión y las ganancias o pérdidas para el Fondo pueden ser mayores que el coste del derivado. Los derivados también conllevan otros riesgos, en particular, que la contraparte de un derivado no pueda cumplir con sus obligaciones contractuales.
  • Cuando el Fondo, o una clase de acciones/participaciones con cobertura, trata de mitigar los movimientos del tipo de cambio de una divisa en relación con la divisa base, la propia estrategia de cobertura puede tener un impacto positivo o negativo en el valor del Fondo debido a las diferencias en los tipos de interés a corto plazo entre las divisas.
  • Los valores del Fondo podrían resultar difíciles de valorar o de vender en el momento y al precio deseados, especialmente en condiciones de mercado extremas, cuando los precios de los activos pueden estar bajando, lo que aumenta el riesgo de pérdidas en las inversiones.
  • Una parte o la totalidad de los gastos en curso del Fondo se pueden tomar del capital, lo que puede debilitar el capital o reducir el potencial de crecimiento de capital.
  • El Fondo podría perder dinero si una contraparte con la que negocia el Fondo no está dispuesto o no es capaz de cumplir sus obligaciones, o como resultado de un fallo o retraso en los procesos operativos o del fallo de un proveedor externo.
  • Además de los ingresos, esta clase de acciones podrá distribuir las ganancias de capital realizadas y no realizadas y el capital original invertido. Los honorarios, cargos y gastos también se deducen del capital. Ambos factores pueden dar lugar a una erosión del capital y a una reducción del potencial de crecimiento de capital. Los inversores también deben tener en cuenta que las distribuciones de esta naturaleza pueden ser tratadas (y gravadas) como ingresos dependiendo de la legislación fiscal local.