Summary
The long winter for Growth stocks
Tech-led Growth (IWF) stocks sold off this year, and Value (IWD) back into fashion. Lessons from the 2000 ‘tech bubble’ is that the Growth ‘winter’ could last. Relative valuations are still high and some earnings pulled forward by the pandemic. The low inflation and interest rate world is gone. Growth catalysts are stabilizing bond yields or a recession, but sustainably only for ‘big-tech’. Stay invested, focused on Value stocks.
Near a 20%’ ‘bear’ market drop
A sixth straight week of down markets saw S&P 500 close to the -20% ‘bear’ market level. US inflation eased but stubbornly over 8%, and Fed talking 0.5% rate hikes, whilst big equity volatility dramatically spread into crypto. Value equity segments stayed resilient with Growth and tech seeing the most pain. Fundamentals stressed but secure with Q1 profits growth 10% in US and 40% in Europe. See latest presentation, video updates, and twitter @laidler_ben.
The start of US inflation relief
US May inflation a key inflection point, declining to 8.3%. Normalization will be a long and volatile road but peak likely been seen, allowing gradual ‘less bad’ relief to stressed markets.
Companies didn’t get the ‘crisis’ memo
Companies did not get the market crisis memo. Earnings and capex are rising at double digits and acquisitions continuing. This is a valuation led sell-off with fundamentals firm.
Australia a ‘lucky’ country haven
Australian equities (AUS200) been resilient, as part of return to Value; overweight commodities and underweight in tech. Rising interest rates could help the big financials sector.
Bitcoin caught in a double sell-off
Double whammy of high equity volatility and TerraUSD depeg drove sell-off, and opportunity for growing institutional investors.
Crypto slumps on stablecoin depeg
Sharp sell-off took Bitcoin (BTC) and Ethereum (ETH) below key $30,000 and $2,000 levels, and market cap. of asset class to $1.3 billion. Depeg of 3rd largest stablecoin TerraUSD, and collapse of paired Terra (LUNA), drove concern across crypto. Other stablecoins held 1:1.
Commodities wobble on China fears
Commodities eased on US dollar strength and concerns in no.1 importer China, as lockdowns continue and imports stall. Copper and aluminium among metals most exposed, with China 50%+ of demand. Ag bucked downtrend. Remain in a commodity ‘sweet spot’.
The week ahead: Taking a data breather
1) A rare break from the data onslaught, with ECB minutes the highlight, as they consider a July hike start.
2) Big country ‘G7’ finance and central bank heads meet as key global issues mount.
3) Successful Q1 earnings season winds down with US retailers WMT, HD , TGT, LOW.
Our key views: All about valuations now
Markets seeing biggest sell-off since 2020 covid crash, as bond yields crush valuations, and overwhelm decent earnings. Fundamentals are stressed but secure. See relief from ‘peak’ inflation, and China stimulus. Focus on ‘barbell’ of cheap Value cyclicals and ‘defensives’: Value, commodities, alongside healthcare, and high dividends. We are cautious on bonds.
Top Index Performance
| 1 Week | 1 Month | YTD | |
| DJ30 | -2.14% | -6.54% | -11.40% |
| SPX500 | -2.41% | -8.39% | -15.57% |
| NASDAQ | -2.80% | -11.58% | -24.54% |
| UK100 | 0.41% | -2.60% | 0.46% |
| GER30 | 2.59% | -0.96% | -11.69% |
| JPN225 | -2.13% | -2.46% | -8.21% |
| HKG50 | -0.52% | -7.53% | -14.95% |
*Data accurate as of 16/05/2022
Market Views
Nearing a -20% ‘bear’ market
- A sixth straight markets down week saw S&P 500 narrowly above -20% ‘bear’ market level. US inflation eased but stickly over 8%; Fed talking 0.5% rate hike pace; and high equity volatility dramatically spread to crypto. Value equity segments stayed resilient with Growth and tech seeing the most pain. Fundamentals stressed but secure with Q1 profits growth 10% in US and 40% in Europe. See Page 6 for Resources guide of reports, presentations, videos, twitter.
The start of US inflation relief
- May’ US inflation report was a key inflection point. The year-over-year rate peaked and fell to 8.3%, and month-over-month decelerated sharply. A normalization to Fed’s 2% inflation target will be a long road, with many prices ‘sticky’, and labour and housing markets tight.
- But we see room for some gradual relief from the remorseless impact of the Fed ‘vice’, of ever higher bond yields (pushing down valuations) and recession risks (raising concerns company earnings), on very stressed equity markets. ‘Less bad’ news starts to build a market bottom.
Companies didn’t get the crash memo
- Financial conditions are tightening and equity valuations falling. Yet managements have not received the crisis memo. Earnings and capex are rising double digits, and companies flexing cash flows and balance sheets on acquisitions. It’s a valuation correction, with fundamentals still secure, and managements confident.
- Last week alone saw Prologis (PLD) $24 billion bid for Duke Realty (DUK), Phillip Morris (PM) $16 billion offer for Swedish Match (SWMA.ST), and Pfizer (PFE) offer for Biohaven (BHVN).
Australia a ‘lucky’ country haven
- The world’s 8th largest equity market (AUS200), has been resilient this year, along with many fellow commodity-heavy and forgotten Value markets like UK, Canada, Brazil. Australia’s ‘lucky’ safer-haven status is helped by a strong dose of financial stocks, at 1/3 the market each, and little exposure to worst-performing tech.
- The big financials weight makes the market surprisingly ‘domestic’ with only c40% sales from overseas, and their profits could benefit from the start of the interest rate upcycle. Whilst its booming commodity exports (see chart) are exposed to the slowdown, and the policy responses, in its top trade partner China.
Bitcoin caught in double sell-off
- All assets, bar commodities, have been swept up in a sharp sell off. Risk-aversion spiked as the Fed accelerated its inflation-driven interest rate pivot and tightened financial conditions.
- Bitcoin’s (BTC) fall started earlier (six months), been deeper (-60% from $69,000), significantly worsened by contagion from the UST stablecoin depeg, but also the least surprising (16th ‘crash’ of decade). Retail crypto ownership is already high and resilient. But institutional ownership is still low and could take advantage of the current crash. This has been raising asset correlations of what is still only a $600 billion asset, or 5% the value of mined gold.
US ‘sticky’ versus ‘flexible’ inflation (last 45-years)
Crypto slumps on stablecoin depeg
- Crypto markets slumped lower with strong equity market volatility and contagion from the depeg of the 3rd largest stablecoin USDTerra.
- Sell-off took Bitcoin and Ethereum below key $30,000 and $2,000 price levels, and average price decline over 60% from November highs, in its 15th big correction of the past decade.
- Algorithmic TerraUSD (UST) stablecoin fell 80% as market volatility saw it break its 1:1 peg, and announce plans to build collateral reserves. It’s paired token Terra (LUNA) fell to near zero. Other stabelcoins like $80 billion market cap. Tether (USDT) were also pressured but the peg held, providing some relief to the asset class.
Commodities wobble on China fears
- Commodities eased back from there recent highs as global demand fears mounted, with continued covid-lockdowns in no.1 commodity importer China, and the US dollar remained very strong. April Chinese imports saw 0% growth for the second straight month.
- Industrial metals, like copper and aluminium, where China represents over 50% of total global demand led recent price weakness. Whilst agricultural markets, led by wheat, were more resilient, with prices near 14-year highs, on supply disruption, as the Ukraine war continues. Pre-war Russia and Ukraine were a combined 30% of global wheat exports.
US Equity Sectors, Themes, Crypto assets
| 1 Week | 1 Month | YTD | |
| IT | -2.97% | -11.75% | -24.84% |
| Healthcare | -0.88% | -9.16% | -12.24% |
| C Cyclicals | -2.79% | -16.27% | -26.05% |
| Small Caps | -2.55% | -11.48% | -20.16% |
| Value | -1.64% | -6.17% | -7.84% |
| Bitcoin | -16.55% | -27.29% | -36.74% |
| Ethereum | -23.17% | -33.41% | -44.85% |
Source: Refinitiv, MSCI, FTSE Russell
The week ahead: Taking a data breather
- Markets take a breather from recent onslaught of central bank and economic data. Focus the ECB meeting minutes (Thu), with chance of a first July rate hike rising, with inflation at 7.5%. Plus China activity data and US retail sales.
- Big country ‘G7’ finance ministers and central bank heads meet in Bonn (May 18-20) as world faces unprecedented combination of surging inflation, energy crisis, and supply bottlenecks.
- The US Q1 earnings season winds up with retailers WMT, HD, LOW, TGT, plus tech’s CSCO, AMAT, and Europe’ VOD, RYAAY, EZJ.L. US profits have risen 10% and Europe’s 40%.
- Other highlights Block (SQ) and Caterpillar (CAT) investor days, and biotech’s American Society of Gene & Cell Therapy annual meet.
Our key views: All about valuations now
- Markets are seeing the biggest sell-off since the 2020 covid crash, driven by higher bond yields and lower valuations, and swamping decent earnings. We see fundamentals as stressed but secure. Look for support from Q1 earnings, and relief from ‘peak’ inflation, and China stimulus.
- Economies are reopening and growth robust. The aggressive Fed hiking cycle is increasingly well-priced and inflation starting to peak.
- Focus a ‘barbell’ of cheap cyclicals and select ‘defensives’: Value, commodities, and high dividends and healthcare. Cautious on bonds.
Fixed Income, Commodities, Currencies
| 1 Week | 1 Month | YTD | |
| Commod* | -1.56% | -3.11% | 29.39% |
| Brent Oil | -1.77% | -0.43% | 42.70% |
| Gold Spot | -3.85% | -8.45% | -1.10% |
| DXY USD | 0.78% | 3.95% | 8.85% |
| EUR/USD | -1.28% | -3.71% | -8.44% |
| US 10Yr Yld | -21.24% | 8.78% | 140.40% |
| VIX Vol. | -4.37% | 27.18% | 67.65% |
Source: Refinitiv. * Broad based Bloomberg commodity index
Focus of Week: The long winter for Growth stocks
Anatomy of the dramatic Growth stock sell off, as Value comes back into fashion
So-called Growth (IWF) stocks have had a terrible time recently, with stock price weakness spreading from ‘disruptive tech’ and ARK Innovation (ARKK) to meme stocks, work-from-home, and most recently ‘big-tech’. There has been nowhere to hide. By contrast Value (IWD) stocks, that have lagged the rally of the past decade, have been a lot more resilient. The US Growth stock index, which is focused on tech (XLK), communications (XLC), and consumer discretionary (XLY) sectors, is down 30% this year. Value, focused on healthcare (XLV), financials (XLF), and industrials (XLI), is down under 10%. This Value turnaround may have more to go, as it has still lagged Growth 200% the past decade, and its valuation discount double average.
Lessons from the 2000 ‘tech bubble’ is that the Growth ‘winter’ could last
We saw this Growth underperformance movie before in the aftermath of the ‘tech bubble’ in 2000. Much is different now, with tech adoption greater and more companies making profits. But the era is a warning to buying back Growth stocks too early. They fell over 25% a year for three years then, vs the cumulative loss for Value stocks of under 5%. Relative valuations are not that different today, with Growth price/earnings valuations near 30x then and now, and some earnings ‘pulled forward’ by the pandemic. By comparison, Value is on near half that and still at twice the relative valuation discount of the past decade (see chart).
Low inflation and low interest world gone. Growth catalysts are stabilizing bond yields or recession
We are not going back to the pre 2022 world of uber-low inflation and interest rates that were supporting very high valuations and huge capital inflows to tech. A higher discount rate, like the 10-year US bond yield near 3%, reduces the present value of future cash flows. This most impacts expensive stocks with the greatest growth in the future, like many tech stocks. A stabilisation of US bond yields would crucially take some pressure off and allow a temporary respite. These yields have already doubled this year and cannot rise forever. Similarly, rising recession risks could change the outlook and investor appraisal for the more defensive big-tech stocks, with their strong cash flows, high profit margins, and fortress balance sheets.
Staying invested but Value focused. Big tech is the opportunity within Growth.
We believe markets are closer to the bottom than top of the sell-off. Fundamentals are stressed but secure, whether GDP or earnings growth, and sensitive to ‘less bad’ news. Long term returns to buying these levels of pessimism and pullbacks are historically favourable. Yet its a world of high-for-longer inflation and unprecedented double barrel Fed policy response, with other risks from Ukraine war to China lockdown. This argues for Value and defensive positions, from commodities to healthcare to reopeners, to weather the storm. ‘Big tech’ is the Growth opportunity when bond yields peak, or recession risks grow.
US Value Index price/earnings multiple discount to US Growth index (%)
Key Views
| The eToro Market Strategy View | |
| Global Overview | Geopolitical risks alongside the Fed hiking cycle is boosting uncertainty and weakening markets. We see this as slowly fading, the global growth outlook secure, and valuations more compelling. Focus on cheap cyclical and defensive assets within equities, like Value, plus commodities, crypto. Relative caution on fixed income and the USD. |
| Traffic lights* | Equity Market Outlook |
| United States | World’s largest equity market (60% of total) seeing strong c4% GDP growth and with room for more earnings upside surprises. Valuations have now fallen back to average levels, and are well supported by still-low bond yields and high company profitability. Fed interest rate risks are now well-priced. See cyclicals and value catch-up, after a decade of underperformance, whilst big-tech is supported by its structural growth outlook. Now see overseas markets leading. |
| Europe & UK | Pressured lower by proximity and exposure to Ukraine crisis. Recession risks rising with Russia impacts and energy crisis. But 1) macro ‘buffers’ of rising fiscal spending (defence and refugees), zero-bound interest rates (‘dovish’ ECB), and weak Euro (50%+ sales from overseas). Equities helped by 2) greater weight of cyclical sectors, and lack of tech, 3) 25% cheaper valuations vs US, 4) decade of underperformance made under-owned. UK favoured over continent. |
| Emerging Markets (EM) | China, Korea, Taiwan dominate EM, with 60% weight, and is more tech-centric than US. China outlook improving as cuts interest rates (opposite of rest of world) reducing slowdown and property sector risks, focuses on stability ahead of 20th Party Congress, and with valuations now 45% cheaper than US and market heavily out of favour. Will support EM, but is exposed to Fed tightening. China recovery also helps global sectors from luxury to materials. |
| Other International (JP, AUS, CN) | Canada and Australia benefit from strong equity market weight in commodities and financials, as global growth rebounds and bond yields set to rise. Japanese equities among cheapest of any major market and vaccination rates accelerating, but has structural headwinds of low GDP growth, an ageing population, and world’s highest debt. |
| Traffic lights* | Equity Sector & Themes Outlook |
| Tech | ‘Tech’ sectors of IT, communications, parts of consumer discretionary (Amazon, Tesla), dominate US and China. Expect more subdued performance as bond yields rise. But are structural stories with good growth, high margins, fortress balance sheets that justify high valuations. ‘Big-tech’ the new defensives. ‘Disruptive’ tech more vulnerable. |
| Defensives | More attractive as macro risks rise and bond yields better priced. Consumer staples, utilities, real estate attractive defensive cash flows, less exposed to rising economic growth risks, and robust dividends. But also sensitive to bond yields. Healthcare most attractive, with cheaper valuations, more growth, some cost protection. |
| Cyclicals | We expect cyclicals – consumer discretionary (autos, apparel, restaurants), industrials, energy, and materials, to lead performance. Are most sensitive to re-opening economies, resilient GDP growth, and higher bond yield outlook, with more sensitive businesses, depressed earnings, cheaper valuations, and been out-of-favor for many years. |
| Financials | Financials will benefit from resilient GDP growth, with higher loan demand and lower defaults. Similarly, they benefit from higher bond yields, charging more for loans than they pay for deposits. Sector has cheapest P/E valuation of any, and regulators giving flexibility to pay large 8-10% dividend and buyback yields. |
| Themes | We favour Value over Growth on GDP resilience, lower valuations, rising bond yields, under-ownership after decade under-performance. Dividends and buybacks recovering with cash flows. Power of dividends under-estimated, at up to 1/2 of total long term return. Secular growth of Renewables and Disruptive Tech themes. |
| Traffic lights* | Other Assets |
| Currencies | USD well-supported for now by rising Fed interest rate outlook and ‘safer-haven’ bid on virus fourth wave virus. This is likely more modest than prior USD rallies as rest of world growth recovers and virus fears ease. A strong USD traditionally hurts EM, commodities, US foreign earners, such as tech, but helps EU and Japan exporters. |
| Fixed Income | US 10-year bond yields to rise modestly as inflation above 2% average Fed target, ‘real’ inflation-adjusted yields negative, Fed to gradually tighten policy. Will be modest as inflation expectations already high, wide spread to other market bond yields, and structural headwinds of all-time high debt, poor demographics, and low productivity. |
| Commodities | In ‘sweet spot’ of robust GDP growth, ‘green’ industry demand, years of supply under-investment, recovering China, and Russia supply crisis. Industrial metals and battery materials well positioned. Oil helped by slow return of OPEC+ supply and Russia 10% world supply problems. Gold helped by risk-aversion but held back by rising bond yields. |
| Crypto | Institutionalization of bitcoin market barely begun, as asset class benefits from very strong risk-adjusted returns and low correlations with other assets. Altcoins have outperformed as see broader interest and use cases. Clear supply rules a benefit as inflation rises. Volatility remains very high, with the 15th -50% pullback of the last decade. |
| *Methodology: | Our guide to where we see better risk-adjusted outlook. Not investment advice. |
| Positive | Overall positive view, and expected to outperform the asset class on a 12-month view. |
| Neutral | Overall neutral view, with elements of strength and weakness on a 12-month view |
| Cautious | Overall cautious view, and expected to underperform the asset class on a 12-month view |
Source: eToro
Analyst Team
| Global Analyst Team | |
| CIO | Gil Shapira |
| Global Markets Strategist | Ben Laidler |
| United States | Callie Cox |
| United Kingdom | Adam Vettese Mark Crouch Simon Peters |
| France | Antoine Fraysse Soulier David Derhy |
| Holland | Jean-Paul van Oudheusden |
| Italy | Gabriel Dabach |
| Iberia/LatAm | Javier Molina |
| Poland | Pawel Majtkowski |
| Romania | Bogdan Maioreanu |
| Asia | Nemo Qin Marco Ma |
| Australia | Josh Gilbert |
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