Hot earnings to keep fire under growth-stock rally

Sat Apr 29, 2017 8:32am EDT
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By Sinead Carew

NEW YORK (Reuters) - Don't look for the outperformance of growth stocks to fade any time soon, as long as corporate earnings continue to improve and hopes remain for stronger economic growth.

The Russell 1000 Growth index .RLG, which tracks such shares, is up 10.9 percent so far this year, outpacing the U.S. benchmark S&P 500 stock index's 6.6 percent rise and the 2.8 percent advance of the Russell 1000 Value index .RLV.

And it's not just a U.S. phenomenon. Growth stocks - whose profits are expected to grow at a faster pace than the broader market - are also outperforming their value counterparts in Asia and Europe. Still, the appeal of riskier stocks perceived as better positioned to ride an accelerating global earnings tailwind, as opposed to those with a greater cushion of safety, is nowhere as far ahead as it is on Wall Street.

In the United States, an improving outlook for corporate earnings should help keep growth names in vogue, according to John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey.

The average estimate of analysts for earnings per share growth this year of S&P 500 companies has risen to 11.3 percent from 10.9 percent at the start of the month, according to Thomson Reuters data, a trend that should continue to blunt concerns about lofty growth valuations.

"When you have an earnings recovery, growth stocks will outperform. When you don't have good earnings, that's when people are looking for value," said Praveen.

Hopes for pro-business U.S. policy changes under the administration of President Donald Trump will likely also keep expectations for economic growth elevated, helping to maintain the case for growth stocks.

"The value stocks have done okay but growth has done so much better in the anticipation we'll see a pickup in economic growth," said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago. "Companies that are going to be more levered to economic growth tend to be growth stocks."   Continued...

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., April 20, 2017. REUTERS/Brendan McDermid