October 28, 2020 05:22 AM RSS

Market Valuation Indicator Has Never Been This Unbalanced

  • Wall Street Rebel | James DiGeorgia
  • 09/20/2020 2:45 PM
Market Valuation Indicator Has Never Been This Unbalanced

CFRA is an independent equity research firm that acquired S&P’s Equity Research department on October 1, 2016. CFRA Chief Investment Strategist Sam Stovall, the author of The Seven Rules of Wall Street, is warning that the valuation between growth and value stock returns may be predicting a significant correction for the U.S. stock market.


Sam Stovall is a well-known Wall Street stock market analyst who focuses on market history and valuations and industry momentum strategies. Stovall writes a weekly investment piece on CFRA’s MarketScope Advisor platform that many of the most influential market players read without fail. In one of his recent issues, Sam tells his readers that he has been watching the rolling 12-month differential between growth and value stock returns. As of August 31, 2020, the differential was at its highest month-ending level in the history of the stock market.

As we entered September, that level was almost 60% higher than its two-standard deviation threshold, and surpasses and according to Stovall…

“The highs set during the tech bubble of the late 1990s.”

Stovall is correct about the imbalance. What’s more, the last time that growth stock and value stock valuations were this disconnected, the U.S. stock market corrected itself. It collapsed back into the lower-priced value, as we saw dramatically in 2000 (see chart below).

Stovall points out, by the way, that the principal sectors dominating “growth” are tech, consumer discretionary, and communication services.

Alt: (S&P Growth vs. Value chart)

Stovall points out that…

“Currently, the S&P 500 Growth Index has risen roughly 56% from March 23 through Friday’s close, while the S&P 500 Value Index has gained about 38%. And even following the big correction, we saw in growth stocks to kick off September, the divergence between value and growth is still the highest since late 1999“.

Stovall went on to say during an interview he gave Fortune, this is

“A concern for me, but it doesn’t really seem to be a concern for the market, at least in the near term.”

Looking back at the big stock market bubble in 2000, Stovall told Fortune …

“Back then, maybe we were worried about tech individually, whereas today, maybe the concern is more to do with growth versus value

“I feel as if we’re in a bubble, at least based on the growth versus value disconnect, but instead of it being a bubble that requires the entire market to blow up, maybe it’s more like, here’s a reason why we will probably go through some rotation from growth into value.”

Stovall isn’t the only analyst paying attention to the imbalance of these two areas of the market when measured against one another. Analysts Toni Sacconaghi of AllianceBernstein issued a note to his firm’s clients on Monday that pointed out that over the past few years, there has been…

 “Unprecedented migration” (into to growth stocks, and the) “strength and sustainability of this growth rally in tech and the broader market is probably the biggest question among investors today.”

Still, most analysts on Wall Street are undeterred by this warning sign for the stock market. Analysts at Goldman Sachs issued a note this past Wednesday saying, “growth is more valuable to investors than ever in the low-interest-rate environment that is likely to persist for years.” They point out growth stocks have outperformed value stocks during the past one, three, five, and ten years.

Goldman Sachs’s last note on the subject also points out that while there may be “short-term disruptions,” overall, “investor demand for secular growth will persist.” In doing so, the investment banking firm says this has been and may continue to be driven due to Federal Reserves’ renewed commitment to keep interest rates at roughly zero likely through 2023.

Despite Goldman Sachs’s opinion, this imbalance may be an important market signal that the next market bubble burst is approaching and Stovall’s word of caution in his last week’s issue…

 Today, we’ve got to be careful. Maybe growth is the new tech” is on point.


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