Select segments of growth still providing steady returns

Key takeaways:

  • Following last year’s plunge across markets, technology and growth stocks are back on top
  • Aside from a brief wobble in February, year-to-date growth has crushed every other investment style

Following the YTD strength in equity markets, Russ Koesterich discusses how a combination of cyclicals, and a growth bias may serve investors well in today’s market.

Following last year’s plunge across markets, technology and growth stocks are back on top. Aside from a brief wobble in February, year-to-date growth has crushed every other investment style. But while growth continues to advance, since early June there has been a subtle shift in market leadership. Tech is now narrowly underperforming with the top performing sectors being mostly cyclical.

The shift in leadership has occurred against a backdrop of both higher interest rates and an improving economic outlook. In this environment, investors are increasingly favoring cyclical expressions, i.e., companies that stand to benefit from economic resilience. My take is to combine the two themes – cyclicals and a growth bias – and maintain a tilt towards reasonably valued growth names, otherwise known as GARP.

Back In early February I suggested a tilt towards GARP. Despite growth dominating equity performance in the spring, cyclicals and GARP have been outperforming since early June. Not only has it beaten growth, but also the broader market and other investment styles, notably value and momentum.

Valuation and economic resilience

Part of the reason for the relative slip in growth’s performance is valuation. The style’s outperformance has been driven by relentless multiple expansion. In other words, tech and tech-related names have soared on higher valuations. In fact, soaring tech valuations have fed through to the broader U.S. equity market. The 20% gain in U.S. equities has been overwhelmingly driven by higher multiples rather than soaring earnings (see Chart 1). As a result, the technology sector now trades at some of the steepest valuations of the past 30 years.

S&P 500 sources of total return

Garo revisited chart

Refinitiv Datastream, S&P 500 and BlackRock Investment Institute Jul 25, 2023
Notes: The bars show the breakdown of the S&P 500's 12-month return onto dividends, earnings growth and valuation (multiple). Earnings growth is based on the 12-month change in 12-month forward I/B/E/S earnings estimates. Returns are based on the S&P 500 index.

That said, the interesting thing about today’s market is that outside of tech, most other sectors are trading below their long-term median valuation. One advantage of the GARP tilt is that it provides broader exposure to different, cheaper parts of the market.

Outside of valuation, GARP offers the potential for exposure to names geared to economic resiliency. As the economy improves – a Bloomberg survey of economists saw 2023 consensus U.S. gross domestic product (GDP) rise from 0.3% in January to 1.5% today – cyclical exposure is likely to be rewarded. The S&P 500 GARP Index evidences a higher weighting to cyclical industries such as energy, chemicals, transport, and home builders. These are all parts of the market likely to benefit from improving economic prospects.

GARP and ‘Value with a Pulse’

 Another way to identify GARP like names is to look for value stocks with a catalyst. My colleague Randy Berkowitz refers to this approach as ‘value with a pulse’. This involves identifying companies that are not only cheap relative to peers but also have evidence improving fundamentals, such as improving earnings expectations.

While I still like growth names long-term, the magnitude of the recent run-up suggests adding other investment styles as well. GARP displays an attractive mix of reasonable valuations and leverage to a remarkably resilient economy.

Explore Global Allocation products

View BlackRock’s Global Allocation model portfolios available in various styles to align with a spectrum of investment goals.
Explore Global Allocation products

To obtain more information on the fund(s) including the Morningstar time period ratings and standardized average annual total returns as of the most recent calendar quarter and current month-end, please click on the fund tile.

The Morningstar Rating for funds, or "star rating," is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.

Russ Koesterich
Portfolio Manager
Russ Koesterich, CFA, is a Portfolio Manager for BlackRock's Global Allocation Fund and the lead portfolio manager on the GA Selects model portfolio strategies.