Morning Notes — Implications

Decelerating inflation and slower growth should weigh on value stocks more than quality. Year-to-date, the S&P 500 Value Index is outperforming the S&P 500 by 930bp.  Most of the value sector outperformance is coming from Energy, while Materials have contributed less and Financials have been a drag.  We expect Energy to continue outperforming within the value style, but the group could see a near-term pullback as the focus shifts from inflation to growth concerns.  If the inflation outlook becomes less pessimistic, secular growth (Tech) could begin to outperform as bond yields peak and multiples stabilize.  A peak in bond yields and an easing of dollar could even lead to a trough in the broad earnings cycle by year-end.