Growth stocks are hitting new highs relative to value stocks within the Russell 1000, according to RBC Capital analysts.
The bank says "Old, safe, secular leadership" has bounced back strongly, with the top five and top ten names in the S&P 500 outperforming the rest of the index in both performance and market cap concentration.
Analysts believe several factors contribute to the stalling rotation trade. Firstly, the shift has coincided with rising 10-year yields and diminishing optimism about interest rate cuts.
Secondly, earnings dynamics have shifted. Although value and the broader S&P 500 briefly led during much of the first quarter of 2024, recent weeks have seen upward revisions to sell-side EPS estimates favoring growth companies and the top ten S&P 500 names, mirroring trends seen throughout 2023.
Moreover, economic conditions that previously supported the rotation trade have weakened. RBC notes that 2024 US GDP forecasts have stalled around 2.4%, slightly below average, explaining that historically, when GDP growth runs cool or below average, growth and large-cap stocks tend to outperform.
Conversely, value and small-cap stocks typically gain strength when GDP growth exceeds average levels. Additionally, recent earnings reports have tempered economic enthusiasm, with companies indicating that inflation is significantly impacting consumer behavior.
For the rotation trade to revive, several conditions must be met. Analysts suggest that the 10-year yield needs to stabilize, clarity around monetary policy and timing of rate cuts must improve, and broader market earnings trends need to surpass those of the biggest growth names. Lastly, economic excitement must return to sustain momentum.