- Big-name growth stocks saw their stellar run in the pandemic era come to an end in early 2022.
- The shares of Meta, Amazon, Apple, Netflix and Google are all below those of the broader US market.
- JPMorgan’s equity strategists wondered if those stocks now looked cheap.
Big tech stocks saw their stellar pandemic period come to an abrupt end in early 2022.
With geopolitical turmoil in Ukraine, high inflation around the world, and expectations of rising interest rates, the broader market started the year down sharply. But the shares of Meta (Facebook), Apple (AAPL), Amazon (AMZN),
(NLFX) and Alphabet (GOOGL) are faring even worse than the rest of the market, which begs the question: are these growth stocks now cheap enough to buy?
For JPMorgan, the answer is no. Strategists Mislav Matejka, Prabhav Bhadani, Nitya Saldanha and Karishma Manpuria reviewed the market in detail for their latest equity strategy report.
stocks – or Meta (born Facebook), Amazon, Apple, Netflix and Alphabet (Google) – are all down, even relative to the broader US stock market, which is down more than 9% so far in 2022.
Shares of Meta crashed after the company reported its first-ever drop in daily active users last quarter, while Netflix took a similar plunge when the company announced it believed subscriber growth slow down in the next quarter. As a result, shares of Meta are down more than 39% year-to-date, while Netflix is down 36%. Meanwhile, Apple shares are down 7%, while shares of Amazon and Alphabet are both down more than 9% this year.
But according to the JPMorgan team, the problem isn’t the price of these high-growth stocks, it’s the timing. Looking at the big picture, the JPMorgan team isn’t convinced that growth stocks are a good deal right now.
“Despite recent underperformance, growth continues to trade near highs, against a multi-year backdrop,” they wrote. “In a longer-term context, the recent growth underperformance is much less pronounced, as it follows years of outperformance.”
“Similarly, FAANG’s recent underperformance also looks relatively muted, given its strong outperformance over the past decade. In fact, the price gap between tech and banks is still close to the widest on record.”
Invest in value rather than growth
In this context, where should investors put their money? JPMorgan’s team said that despite its recent rally, value-oriented investments continue to trade “absolutely cheap relative to growth.”
“While growth stocks have weakened lately, they have fallen, but are still not outright cheap,” they wrote. “On the other hand, financials and commodities in particular have rallied strongly, but are far from expensive, especially relative to underlying commodity prices and the magnitude of the changes. potential rates by central banks.”
JPMorgan noted that earnings from growth companies “may no longer be outstanding,” while earnings from some value sectors are “rebounding.” They also said the stock’s forward earnings appear to be “bottoming out” against growth stocks.
“The big driver remains the direction of bond yields,” explained the JPMorgan team. “Over the past 10 years, the growth style has benefited from negative real rates and subdued bond yields, repricing against value sectors. If bond yields show a more persistent rise, as central banks experience a series of rate hikes and demand-supply for bonds change, then the large valuation premium that growth sectors have relative to value will continue to decline.”
Spiking inflation may not be a “sustainable reason” to backtrack and buy growth stocks, they warned, but it could offer a short-term tactical rebound.
“We believe in looking through the widespread calls for ‘slowdown’ that are currently in vogue and remain optimistic about banks, mining, energy, Assurance, automobiles, Travel and telecoms. The year-to-date market performance follows them well.”
“The question is whether to buy back quality, especially if we see a potential spike in inflation,” the team continues. “In our view, the key is the direction of bond yields – we expect them to continue to rise, and that has always been consistent with cyclical leadership.”
The team also gave a nod to a geographic part of the equity market that looks attractive. “At a regional level, we reiterate our revaluation of the UK to overweight, after six years of caution.”