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Nvidia, Tesla and Meta are helping power a growth-stock surge that has challenged BlackRock and Goldman Sachs

A smiling trader works on the floor of the New York Stock Exchange.
Traders work on the floor of the New York Stock Exchange (NYSE) on October 27, 2022 in New York City.Spencer Platt/Getty Images
  • Growth stocks are beating value peers by the most in 3 years, despite interest-rate increases and banking-sector turmoil.

  • Sizzling rallies in Nvidia, Meta and Tesla shares have helped power the surge in growth stocks.

  • The growth-stock outperformance reflects bets that the Federal Reserve is close to ending its rate hikes, analysts said.

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Some of the biggest names on Wall Street including Goldman Sachs and BlackRock have projected 2023 to be another year for favoring value stocks over their growth peers, amid rising interest rates and looming recession risks.

Yet, market trends have so far played out just the other way around.

US growth stocks are on track for their best quarterly run in three years relative to the value segment, despite fears of an impending economic downturn and the recent financial-sector turmoil sparked by the largest bank collapse since 2008.

The benchmark iShares Russell 1000 Growth ETF is up almost 15% this quarter in relation to its value counterpart, the iShares Russell 1000 Value ETF - the biggest such outperformance since early 2020. Growth stocks are those of companies expected to grow at an above-average rate, and include sectors such as consumer discretionary and tech. But they are also considered riskier, and more vulnerable to higher interest rates and economic downturns.

Goldman Sachs's chief US equity strategist David Kostin said last month that it was time to turn to value stocks such as energy and healthcare -- adding "that'll be the strategy and playbook for the year." BlackRock strategists projected a similar view, saying in a late February report that they expect value stocks to outperform.

Nvidia, Tesla, Meta

Stunning rallies in the shares of tech giants such as Nvidia and Meta as well as electric-vehicle maker Tesla have helped growth stocks beat their value peers by such an impressive margin.

Nvidia's stock is the best performer in the S&P 500 index so far this year, soaring over 80% and boosting the firm's market capitalization by almost $300 billion. It's followed by Meta Platforms with a 70% advance and Tesla with 52%. Ranking fourth is chipmaker AMD with a 50% rise.

Growth stocks have outperformed this quarter mainly due to a retreat in inflation and market interest rates, according to Jamie Dutta, a market analyst at multi-asset online broker Vantage.

Benchmark 10-year Treasury bond yields have declined about 50 basis points so far in 2023 on expectations that the Federal Reserve is close to ending its most aggressive cycle of interest-rate increases since the 1980s. US inflation declined to 6% last month, from a 40-year high of 9.1% reached in June 2022.

"Lower rates feed into lower discount rates, making future cash flows of growth companies more attractive," Dutta said.

The impact of banking turmoil

The recent string of bank implosions - including Silicon Valley Bank and Signature Bank - has increased the probability that the Fed will soon halt its rate increases, according to Dutta. The central bank lifted by rates by 25 basis points this week, bringing the total increase over the past year to a staggering 475 basis points.

"The banking crisis probably means we are very close to the end of the rate hike cycle as financial conditions tighten. That could hasten rate cuts sooner so those growth companies with strong balance sheets and low debt loads will be sought after," Dutta told Insider in emailed comments.

While growth stocks have had a stellar run so far this year,  investors should be wary of the many uncertainties that loom ahead, according to Sylvia Jablonski, CEO of Defiance ETFs.

"It is important to think about what could be next given uncertainty in monetary policy, inflation, and unforeseeable events - whether banks blow up or geopolitical risks," Jablonski told Insider in emailed comments.

"There is also a chance that what has happened with bank collapse in connection with loss of risk appetite from investors and already decelerating inflation, that this gets pulled forward and financial conditions ease. All of this bodes well for tech stocks, cost of capital goes down and the ability to invest in new innovations like AI, machine learning, quantum computing goes up," she added.

'Somewhere to reallocate capital'

Growth stocks' outperformance partly reflects a trend of investors diverting their capital into the stocks of leading tech companies amid the recent banking turmoil, according to Shelby McFaddin, senior analyst at Motley Fool Asset Management.

"With some of the recent turmoil in the financial sector, some investors were left looking for somewhere to re-allocate capital. One of many options is profitable, large cap technology companies. To us, management at some of the leading tech companies have demonstrated to shareholders that they're focusing on operational efficiency and making decisions that will drive earnings and cash flow in a difficult and uncertain environment," McFaddin told Insider in emailed comments.

"To be sure, none of this means that we don't see any sort of fall out or reversal in the event of a near or mid-term downturn. Nothing is certain - past performance is never a guarantee of future results," she added.

Read more: Nvidia stock rides the 'iPhone moment of AI' to add $87 billion in market cap through the banking crisis

Read the original article on Business Insider