Over the past couple of weeks, we have thankfully witnessed new cases of COVID-19 in the US trending lower. Increasingly, we are also seeing governors implementing plans to re-open their state economies in phases. If the US economy continues to open up and economic growth starts to rebound, relative performance of stay-at-home growth stocks may level off or even reverse.
We reviewed performance of companies in the Russell 1000 Growth Index by trailing price-to-earnings (PE) ratios, as shown in the LPL Chart of the Day. Despite a challenging year for US equities, the most expensive stocks in the index, or those with trailing PE ratios over 50 in our analysis, have rallied sharply during the first four months of the year. Some of these companies are beneficiaries of the stay-at-home orders that have been enacted over the past couple of months.
Expensive Growth Stocks Rallying in Down Market for Stocks
While we believe these growth companies could benefit over the long term from attractive secular trends and warrant inclusion in portfolios, we recommend investors be careful about potentially overemphasizing exposure to the most-expensive growth stocks. We believe there is the potential for market leadership to reverse over the near term toward companies with cheaper valuations that may benefit if the economy begins to rebound.
“We recommend suitable investors have relatively balanced exposure to growth and value stocks in the US at this time” said LPL Financial Equity Strategist Jeffrey Buchbinder. “Although it can be tempting to tilt portfolios aggressively toward recent winners, we believe it’s important to maintain valuation discipline in portfolio allocations, while recognizing the potential for market leadership to rotate over the near term as economic growth resumes.”
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References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
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Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
Trailing Price-to-earnings (P/E) – The sum of a company’s price-to-earnings, calculated by taking the current stock price and dividing it by the trailing earnings per share for the past 12 months. This measure differs from forward P/E, which uses earnings estimates for the next four quarters.
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This Research material was prepared by LPL Financial, LLC.
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