Entering the last month of the third quarter, our Investment Management Team is watching the performance of value and growth stocks, U.S. GDP data, labor market sentiment, earnings growth, and the future of interest rates.  

July’s momentum and sentiment profile remained fairly intact in August, but what data is worth noting at the start of September?  

In this article, we address:  

• Value versus growth stocks – What does performance tell us about the average stock going forward?  

• U.S. GDP data – What’s contributing to GDP?  

• Labor market sentiment – How do people feel about the state of the job market? 

• Earnings data – How are companies performing?   

• Interest rates – What do we know about the future of interest rates?    

Value Versus Growth — What’s Outperforming Now?

Looking at a normalized chart (which shows performance gains), both value and growth stocks achieved healthy returns (from 2.5-3.5% gains) in August. However, after value stocks outpaced growth stocks in July, the dichotomy shifted, and growth outpaced value last month, albeit marginally.  

Despite the shift in performance, the volatility profile of value stocks continues to outshine growth stocks, providing a steadier cadence. 

Why does this matter?  

Some investors and experts are beginning to question: “Are stocks overvalued?” August demonstrated that, while the index may be overvalued, that’s not necessarily true for the individual stock.  

Instead, based on the current volatility profile of value stocks compared to growth stocks, the average stock may be poised to outperform the broader index (whether positive or negative performance in absolute terms), and there is support for valuing the market beyond the AI and tech trades. Our Investment Management team continues to use active management to navigate the market with agility.  

U.S. GDP Data — What’s Contributing to GDP?

The second estimate for 2Q GDP data was just released at 1.5% annualized growth.  

Of the four components that contribute to GDP — consumption, investments, government spending, and net exports — the biggest detractor for 2Q was net exports (likely due to geopolitical factors), while the largest attribution came from consumption. Consumption’s impact is especially notable compared to the previous two quarters of earnings growth.  

This could be due in part to the time of year (seasonality), but one of the major reasons for current consumption levels is labor market sentiment.  

Labor Market Sentiment — How Do People Feel About the Job Market?

An industry-recognized survey from The Conference Board tracks the health of the labor market, measuring the percentage of respondents who say jobs are hard to get versus those who say jobs are plentiful.  

Over the last few years, the labor market has normalized, but there is a sustained level of labor market health.  

For example, since June 30 (represented by the vertical green line on the graph), there has been a slight uptick in the percentage of respondents who say jobs are plentiful. This sentiment is supported by current manufacturing data, and survey insights like this tend to be a leading indicator. Therefore, this data generates a positive signal alongside consumption’s impact on GDP, the performance of value and growth stocks, and earnings data.  

Earnings Data — How are Companies Performing?

Earnings in the S&P 500 from May 16 to August 15 increased by 52.12%. This is staggering earnings growth on a quarter-over-quarter basis, especially amidst what many say is an overvalued index (but not an overvalued stock market). 

Going forward, we anticipate toned-down expectations for earnings growth (52.12% is exuberant, not sustainable). Even still, forward guidance for companies remains positive because of the sustained health of the labor market.  

A more uncertain tell-tale sign for the economy and markets over the next 6 months is interest rates.  

Interest Rates — What’s Likely to Happen?

With the new Fed chair and the Treasury Secretary’s intervention in the Treasury market, there is angst around the future of interest rates and an overall uptick this year in expected interest rates. But interest-rate angst isn’t entirely warranted, as the narrative hasn’t changed and expectations have been generally flat, with minor peaks and troughs over the year.  

The reality is that nobody knows exactly what will happen with rates. So far, the Fed has not provided much meaningful direction other than restating their goal to fight inflation. Trying to place definitive bets on which direction rates will go is not a data-driven decision, and answers likely won’t be available until closer to the end of the year.  

Internally, our data and research indicate a likelihood of sustained interest rates with the minor probability of upsides. This would mean lowering duration risk, or the number of years to maturity, in a bond portfolio.  

Overall, however, we maintain our stance that bonds hold more risk than stocks because of the uncertainty around interest rates, and we believe the current volatility profile of interest-rate expectations will generate opportunities in value versus growth stocks.  

Need an expert perspective on your financial plan and portfolio? Reach out to a member of our team using the form below.  

Want to read more like this? Review our July Market Recap discussing “Where Will the Stock Market Go from Here?”