Investors call Powell’s rates bluff and bet on growth stocks | Insights | Bloomberg Professional Services

Bloomberg Market Specialist Michael S. Elko contributed to this article. The original version appeared first on the Bloomberg Terminal.

Background

A shift in market expectations toward the Federal Reserve’s monetary easing has bolstered investor confidence, leading to a resurgence in global growth stocks. The Nasdaq 100 just closed its second-best quarter in a decade, with traders betting that banking turmoil will push the Fed and other central banks to pivot from fighting inflation to cutting rates.

The Issue

The Federal Reserve raised interest rates for the ninth time in a row in March while indicating that further hikes are possible. The move shows the central bank is confident that its efforts to quell inflation won’t exacerbate an emerging banking crisis.

Chair Jerome Powell and others have said that their priority remains taming inflation, but futures traders are betting otherwise. A 25-basis-point rate decrease is priced in by the Fed’s July 26 meeting, with the rate implied by fed funds futures forecast to decline below 4% by the end of 2023.

In March, the increasing possibility of a Fed policy shift led to a surge in growth stocks, particularly in the technology sector, which offers longer payback periods. Value stocks fell on concerns that economies will lose momentum, eroding ‌pricing power for commodity and industrial plays.

Meanwhile, many investors are considering what the likelihood of a hard landing on inflation would have for valuations. If there are rate cuts, the beneficiaries could be tech companies and other firms whose cash flows lie far ahead.

This shift from value to growth echoes JPMorgan Chase & Co. statements from February that cited bond yields.

“The concern is just that [value] will likely weaken this year, as markets reprice back into a recession scenario, while the bond yields could reflect the risk of central banks’ policy mistakes, with continued yield curve inversion,” wrote Mislav Matejka, the bank’s head of global and European equity strategy.

Use Bloomberg’s FTW function to compare the performance of growth and value stocks:

Use Bloomberg’s EQS function to compare the performance of growth and value stocks and screen out growth stocks with positive EPS revisions:

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