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The current rotation away from growth into cyclicals might not be sustainable but could offer a window of opportunity into future winners, according to a Macquarie Desk Strategy report.
Strategists believe that the market is primed for a rotation towards value and cyclicals because those two factors have gone up since the pandemic, relative valuation vs. quality and growth has also gone up, and now disinflation is expected in the U.S, “with investors starting to build-in an expectation of a stronger and more synchronized recovery later into ’25, as well as lower U.S. dollar and higher yen,” wrote Strategist Viktor Shvets.
During the last sessions, there has been a rotation away from growth that should offer a greater support for cyclical emerging markets (EEM) and value styles, he said.
“The key question is how strong and sustainable would this rotation be and whether long term investors should largely ignore it?”
He said that his team is not concerned with high concentration in the markets is that “a modern world of abundance of capital and declining marginal pricing of capital and technology shortens the time it takes to create mega-caps (NVDA), (MSFT), while also accelerating destruction of others that not long ago were mega-caps, and now might be on the way to becoming far more conventional and potentially smaller entities (AAPL), (CSCO), (IBM).”
In the past, this process would have taken decades, but now it can be accomplished in years or even quarters, he added. “Any stock can be quickly propelled to brand-new highs if management makes one or two right decisions on how to position products and/or utilize technology and finance.”
However, smaller turning points — even for companies that are highly profitable — can be “severely penalized,” so “all the winnings go to the winners, with little left for anyone else.”
The good news is that others that benefit from lower marginal costs could see their values rise, eventually changing the composition of the winners.
“In a world of abundance of capital and technology, is there room for value and cyclicality? Our answer is no,” Shvets said; “even though there will be periods of mean-reversion, offering trading opportunities.”
