Morning Notes — Value Outperformance

Rotation? Value is outperforming growth today in reaction to the FDA emergency use treatment authorization and reports suggesting possible fast track vaccine status for the Oxford/AZN candidate. Growth sectors are still higher on the day, but value sectors (Materials, Financials and Energy) are clearly leading, which is generally considered a healthy internal condition for the broad market.  The value sectors just happen to be cyclical this time around (other cyclical sectors include Industrials and Consumer Discretionary) and a bull market led by cyclical sectors is considered more sustainable than one led by defensive sectors (Staples) and bond proxies (Utilities).  Recall our cautionary messages from mid-late January were based on defensive sector leadership and decelerating price trend momentum…that’s not the case today.  The ‘work from anywhere’ beneficiaries are lower as a reflex reaction to the treatment/vaccine headlines.  This needs to be watched as prior episodes of weakness in ‘work from anywhere’ only lasted for ~2-3 days.  We expect value sector outperformance well into September, but remain skeptical this will cause broad rotation out of growth/Tech. 

Sloppy: Tech has vastly outperformed the broad market during the retracement, which has raised concerns about profit taking once mobility trends return to more normal conditions.  It’s a rational concern, but comparing current conditions/valuations to the 2000 dot com bubble is irrational.  In contrast to 2000, the S&P 500 Tech sector currently has strong balance sheets, strong FCF generation and very strong earnings.  Note, the S&P 500 Tech sector delivered positive earnings growth in Q2.