Apple stock has gained 13% this year, giving the tech sector a boost and enabling growth stocks to outperform value stocks by 470 basis points, according to analysts at Goldman Sachs. But this trend will not continue, they believe. (All graphs and charts in this report are courtesy Goldman Sachs.)
Of course many will argue that Apple is/was value, or value and growth, but for this article we are reporting based on Goldman classifications.
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This has been an interesting time on Wall Street, as recently it was reported that biotechnology stocks are the first to outperform five years in a row.
Growth stocks outperform
In a report dated March 27, analyst David Kostin and his team said seven of the ten sectors in the Russell 1000 Growth index have outperformed their counterparts in the Value index so far this year. Apple has gained 13% so far this year, fueling the Russell 1000 Information Tech Growth’s 4% return.
The median Information Tech Growth company saw earnings per share revisions decline 2% while their price to earnings ratios expanded 5%. Most of the companies that contributed to growth in Information Technology stocks, including Apple, Google, Facebook and Twitter, saw positive revisions to their earnings per share and expansion in their price to earnings multiples.
On the other hand, the main drags on Information Technology value stocks, including Microsoft, Intel, EMC, Yahoo and Hewlett-Packard, saw declines of 8%. The analysts say the gap between the Russell 1000 Info Tech Growth stocks and Value stocks can be explained by earnings per share revisions and price to earnings ratio changes.
Apple drives outperformance
Apple’s 13% year to date gain is the main driver of the returns in the Russell 1000 Growth sector and Information Technology Growth sector. The Goldman Sachs team states that consensus estimates for Apple’s earnings per share have climbed 10% so far this year. The company’s price to earnings multiple has also expanded 2% to 14.1%.
Apple makes up 70% of the 4% year to date Information Technology Growth return. The company also contributed more than 70% of Information Tech Growth stocks’ 22% gain in the recent rally.
Within the Russell 1000 Information Technology, the Technology Hardware subsector has seen a 6% return so far this year, while the Internet Software and Services subsector has seen a gain of 5% so far. The analysts add that Tech Growth stocks have outpaced Tech Value stocks by 1,200 basis points so far this year. They further say that this gap is 500 basis points more than the second biggest return difference between them within a sector.
Last week the S&P 500 declined 1.6%. Energy was the best-performing sector, gaining 1.4% as oil prices began to rebound. Industrials lost 2.6%, making the sector the worst-performing in the index. The analysts believe that over the next 12 months, the S&P 500 will gain 3.3%, trading at around 2125. Goldman Sachs remains overweight on the Information Technology sector, but at the index level, they recommend the NASDAQ 100 over the S&P 500.
Growth stocks won’t keep outperforming
The Goldman Sachs team said strong returns from Information Technology, combined with weak economic data from the U.S., boosted growth stocks overall, resulting in their outperformance compared to value stocks. They add that their Current Activity Indicator has fallen off from 4% in November to 2% in February. Investors have been worried about the strengthening of the U.S. dollar, especially against the euro, and unstable oil prices.
Further, the analysts point out that Russell 1000 Growth stocks usually underperform Value stocks after an interest rate hike. They noted that during the three months after the 1994 and 2004 first Fed hikes, the long Russell 1000 Growth sector saw a 1% decline, and the short Value trade saw a 6% decline. As a result, they say the outperformance of these stocks is expected to fade as we near an interest rate hike from the U.S. Federal Reserve. The exception to this rule was during the Tech Bubble.
Three months before the Fed hike, however, the trades remained mostly flat. They saw the overall trend typically stays the same for six months.