The third quarter wasn’t kind to U.S. stocks. The S&P 500 fell 6.4 percent, with stocks battered by everything from fears over China’s growth slowdown and financial market collapse to uncertainty about Federal Reserve policy and the Volkswagen emissions scandal. In June, the consensus view on third-quarter earnings was a 1 percent decline. Heading into earnings season, that figure has been revised downward to a 5 percent decrease. With the fourth quarter underway, none of the issues that rocked markets in the third quarter have been fully resolved, and volatility and uncertainty are still setting the mood. Investors trying to figure out how to play the rest of the year might do best with what’s worked to this point: Growth stocks.
Anyone whose New Year’s resolution was to invest in large-cap growth stocks has done quite well this year. The Russell 1000 Growth Index is up 1.82 percent year to date, while the Russell 1000 Value Index has fallen 4.98 percent. This isn’t a new trend. The outperformance of growth over value began in July 2006—more than nine years ago—with the former besting the latter by 56 percent over that time. Credit Suisse’s Private Banking and Wealth Management division believes the current environment supports the long-term trend, pointing to the fact that earnings expectations for growth stocks have held up better than those for value in the extreme turbulence of the last few months.
To be fair, a large part of value stocks’ downward revision has come courtesy of the energy sector, which has seen its near-term prospects dimmed thanks to low oil prices. Indeed, poor performance in the energy sector played a key role in dragging down overall earnings expectations for the third quarter. Excluding energy stocks, the consensus outlook for the S&P500 is up three percent, not down five percent.
Despite their relatively solid performance of late, investors have an attractive entry point into growth stocks—the healthcare sector has sold off dramatically in recent months. The S&P 500 Healthcare Index has dropped 11 percent since a peak on August 17. Part of that decline was a result of a broader, China-related equities selloff in late August, but in late September, the sector experienced another steep fall when news of a dramatic price increase for an established drug became public, sparking heated debate about pharmaceutical pricing both in political spheres and among the general public. Prices have rebounded from their late-September lows, but are still well below their August levels.