Value Stock Outperformance Could be Temporary

The recent outperformance of value shares over growth, according to an article in The Wall Street Journal, will be a short-lived trend.

The rise in bank stocks and dip in tech stocks led many to believe that the tax reform package was rewarding the Wall Street elite while punishing Silicon Valley investors. However, the article argues, “Under the surface there are two much deeper changes under way, and the important question is whether the tax plan marks the start of a long-run shift in prospects for stocks or was merely a trigger for an overdue rotation.”

Given that the biggest growth stocks are multinational tech companies, the article points out, it’s logical to assume that they would benefit in a big way from a corporate tax rate-cut. It adds, however, that “tax is only part of the story. Just as important are the correction of short-term excesses in the market and the potential acceleration of the economy, and so of interest rate rises.”

The article quotes Societe Generale’s head of quantitative equity research, Andrew Lapthorne, who argues that the shift represents a value rotation rather than a trend triggered by the tax bill. “It seems obvious that the Senate tax approval was the trigger,” the article states, “but the market was ready for some froth to be blown off the biggest gainers.”