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The great value rotation may be over as investors reembrace tech

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Traders working at the New York Stock Exchange (NYSE), on May 19, 2021.

NYSE

Is the great value rotation over? 

The S&P 500 is at a historic high, but investors who earlier this year overweighted their portfolios into reopening stocks like Caterpillar and banks, and away from tech and other growth stocks, appear to be rethinking that strategy.

Many of the companies associated with the “reopening” trade topped out in April or early May:

Cyclical Stocks

Cyclical stocks % off 52-week highs
Whirlpool 14%
United Rentals 14%
Deere 15%
Caterpillar 8%

Materials

Materials stocks from 52-week highs
Vulcan Materials 11%
CF Industries 6%
Martin Marietta 8%

Homebuilding and Home Improvement

Homebuilding/home improvement from 52-week highs
Mohawk 18%
Lennar 18%
DR Horton 18%
Pulte 16%

Now, a final leg of the so-called “value” trade is also cracking this week: banks.

Banks down this week

Banks this week
Regions Financial down 6%
Huntington Bancshares down 7%
Zions Bancorporation down 5%
KeyCorp down 5%
Bank of America down 4%
JPMorgan down 3%

Investors instead have begun rotating back into old-school growth stocks. 

Thursday saw new highs in Cisco, Alphabet and IBM. But perhaps more importantly, formerly deeply out-of-favor speculative growth stocks, many of them associated with Cathie Wood’s ARK funds, have begun to rebound.

Speculative Tech

Speculative Tech Since May 12
Zoom Video up 15%
Roku up 11%
Shopify up 11%
Spotify up 8%
Teladoc up 6%

The changing market narrative

What’s going on?

The market narrative is changing. The narrative in the first quarter was that the reopening would be very strong, bond yields would move up, and inflation may be an issue later in the year.

This was only partially correct. The reopening has been strong, but bond yields have come down, not up, as investors have come to believe: 1) that inflation and supply chain issues may indeed be “transitory,” or temporary, as the Federal Reserve has insisted, and 2) that the second and third quarter is the top in earnings and economic growth.  

“The value trade is unwinding, and the growth bulls are winning,” Alec Young, chief investment officer at Tactical Alpha, told me. “Bond yields are a proxy on the growth outlook,” he told me, noting that bond investors see moderating inflation and a slower rate of growth (though still positive) in the second half of the year.

The result: Investors are staying in the market, but they are rotating into defensives (health care) and growth (technology). Formerly crowded trades like cyclicals and banks that are associated with the “value trade” are now retreating. 

Why would investors rotate into growth stocks if growth is slowing?

“Value is a more economically sensitive sector because value is weighted toward Industrials, Energy, Materials, and small caps,” Young said.  

“Early in the economic cycle, coming out of a recession, there is more earnings leverage from value stocks, so they are a better investment,” he added.

“The problem is that everything has been compressed,” Young said. “We went into a recession really fast, and we came out of it fast, partly due to all the stimulus. Growth stocks now offer more reliable growth and are less subject to the vagaries of the economic cycle.”

Goldman Sachs’ Ben Snider and David Kostin, in a recent note to clients, agreed: “History, valuations, positioning, and economic deceleration indicate that most of the rotation [from growth to value] is behind us,” they said.

Because this was a “crowded” (overweight) trade, Goldman suggested that many players are likely caught offsides: “Mutual funds are overweight Value to a larger degree than any time in our eight-year data history,” they said. “Hedge funds remain tilted toward Growth, but that tilt has recently fallen sharply and now ranks as the lowest in over five years.”

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House committee passes broad tech antitrust reforms

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A House committee passed a series of sweeping antitrust reforms Thursday after roughly 23 hours of debate.

While the advancement of the six tech-focused bills considered by the House Judiciary Committee beginning Wednesday is a victory for the bipartisan members who introduced them, the markup surfaced rifts within parties that could ultimately hamper the bills’ chances of becoming law.

Several lawmakers made it clear they thought the process from introduction to markup in less than two weeks felt rushed, despite a lengthy investigation preceding the bills. Some said they hoped to see further changes before the legislation reaches the House floor.

Still, the last leg of the debate offered some signs of optimism for those hoping to advance the bills further. Fresh from a recess after passing the fifth bill after 5 a.m. on Thursday, lawmakers returned to the committee room to discuss the Ending Platform Monopolies Act around 11:30 a.m.

The bill — sponsored by antitrust subcommittee Vice Chair Pramila Jayapal, D-Wash., and co-sponsored by Rep. Lance Gooden, R-Texas — would prevent dominant platforms from owning business lines that present conflicts of interest, such as by incentivizing them to favor their own products over rivals’ dependent on their services.

The bill was one of the most aggressive in the package, which also included updates to merger filing fees for dominant platforms, a shift of burden of proof in acquisitions and provision to let state attorneys general have more say in the venue of their antitrust cases. It could essentially force break-ups of businesses like Amazon and Apple, which both sell products or services on their own marketplaces that also serve third-parties. Both stocks closed slightly lower for the day.

Despite the major implications of the bill, it was not the most controversial of the bunch. Lawmakers spent much longer arguing over the data portability mandate under the Access Act as they assessed potential security issues, for example.

Jayapal’s bill also inspired lively debate. Ultimately, the vote fell along similar lines as the others (it passed 21-20, supported by Democrats and Reps. Ken Buck, R-Colo., and Matt Gaetz, R-Fla., and opposed by Republicans backed by Rep. Greg Stanton, D-Ariz., and California Democrats Lou Correa, Zoe Lofgren and Eric Swalwell). But throughout the discussion, it was clear many in the group broadly agreed with the principles of the bill, even if they felt it could use some fine-tuning.

“I will tell you, I’m not 100% there to break up Big Tech, but I’m close,” said Rep. Dan Bishop, R-N.C. “And this is the bill that if it were done right, would be the vehicle to put that on the table.”

Though an amendment he introduced failed, antitrust subcommittee Chairman David Cicilline, D-R.I. and Jayapal expressed a willingness to work with Bishop on potentially including a nod to his idea in the bill. Bishop essentially sought to try to expedite antitrust cases to the courts by removing a regulatory step. Cicilline had called it “the most interesting amendment of the markup” even though he did not support it, and Judiciary Committee Chairman Jim Jordan, R-Ohio called it “the amendment.”

In an interview after the markup on Thursday, Buck, the ranking member on the antitrust subcommittee who supported the legislation, told CNBC he expects more work will be done before the bills move forward.

“I don’t think the bills are going to be on the floor for a couple of months because of the August recess, so I think that the opportunity to work together is certainly there,” he said.

It’s clear that even after such a long debate, the bill authors still have a lot of work to do. After the markup adjourned, bipartisan members of the California delegation on the committee released a joint statement, urging further revision to the bills despite their passage from the committee. They also said the committee members did not have enough time to properly consider the bills prior to the markup.

“The bill text as debated is not close to ready for Floor consideration,” wrote Correa, Swalwell, Lofgren and Reps. Darrell Issa, R-Calif., and Tom McClintock, R-Calif. “We urge the sponsors of the bills to take the necessary time, commit to a comprehensive approach, and work with their bipartisan colleagues of this Committee to address the concerns articulated during markup to further develop these bills.”

Buck responded to criticism from his colleagues who felt they didn’t have enough time to review the bills, saying “it’s a common objection” but that “the ideas in the bill were summarized in reports that were written last October.”

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Nike (NKE) reports Q4 2021 earnings beat

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A man walks in front of Nike products exhibit, on February 22, 2021 in New York City.

John Smith | Corbis News | Getty Images

Nike on Thursday reported fiscal fourth-quarter earnings and sales that topped analysts’ estimates, fueled by record revenue in its largest market, North America.

The company continues to benefit from consumers seeking out comfortable clothing to wear for workouts but also around the house. Even as people return to schools, offices and other social settings, many are still searching for relaxed options like sneakers and stretchy pants.

Nike also saw a boost to its wholesale business — something that was largely inactive a year earlier during the Covid pandemic, when shopping malls and department stores had to temporarily shut their doors and put orders for merchandise on pause.

Nike shares jumped more than 4% in after-hours trading.

Here’s how the company did during its fiscal fourth quarter, compared with what analysts were anticipating, using Refinitiv estimates:

  • Earnings per share: 93 cents vs. 51 cents expected
  • Revenue: $12.34 billion vs. $11.01 billion expected

Nike’s net income for the period ended May 31 rose to $1.5 billion, or 93 cents per share, compared with a loss of $790 million, or 51 cents per share, a year earlier. That topped analysts’ forecast of 51 cents per share, using Refinitiv data.

Total revenue rose to $12.34 billion from $6.31 billion a year earlier, topping estimates for $11.01 billion.

In North America, Nike’s biggest market, sales more than doubled to a record $5.38 billion as the company surged from a year earlier when the Covid pandemic was hitting the retail industry the hardest. The region’s sales were up 29% on a two-year basis.

In Greater China, sales were up just 17% at $1.93 billion. Typically one of the fastest-growing markets for Nike, consumers in China have threatened a boycott after some Western brands like Nike expressed concern about allegations of forced labor in Xinjiang.

Digital sales were up 41% compared with the prior year, and rose 147% compared with the same period in 2019.

“Fueled by our momentum, we continue to invest in innovation and our digital leadership to set the foundation for Nike’s long-term growth,” said Nike CEO John Donahoe.

Find the full earnings press release from Nike here.

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Federal Reserve gives U.S. banks a thumbs up as all 23 lenders easily pass 2021 stress test

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The Federal Reserve announced Thursday that the biggest U.S. banks could easily withstand a severe recession, a milestone for the once-beleaguered industry.

The Fed, in releasing the results of its annual stress test, said that all 23 institutions in the 2021 exam remained “well above” minimum required capital levels during a hypothetical economic downturn.

That scenario included a “severe global recession” that hits commercial real estate and corporate debt holders and peaks at 10.8% unemployment and a 55% drop in the stock market, the Fed said. While the industry would post $474 billion in losses, loss-cushioning capital would still be more than double the minimum required levels, the Fed said.

If there was an anticlimactic note to this year’s stress test, it’s because the industry underwent a real-life version in the past year when the coronavirus pandemic struck, leading to widespread economic disruption. Thanks to help from lawmakers and the Fed itself, banks fared extremely well during the pandemic, stockpiling capital for expected loan losses that mostly didn’t materialize.

Nevertheless, during the pandemic, banks had to undergo extra rounds of stress tests and had restrictions imposed on their ability to return capital to shareholders in the form of dividends and buybacks. Those will now be lifted, as the Fed has previously stated.

“Over the past year, the Federal Reserve has run three stress tests with several different hypothetical recessions and all have confirmed that the banking system is strongly positioned to support the ongoing recovery,” Vice Chair for Supervision Randal K. Quarles said in a statement.

Dividend increases and buybacks coming

After passing this latest exam, the industry will regain a measure of autonomy it lost since the last crisis. After playing a key role in the 2008 financial crisis, banks were forced to undergo the industry exam, and had to ask regulators for permission to boost dividends and repurchase shares.

Now, under something called the stress capital buffer framework, banks will gain flexibility in how they want to dole out dividends and buybacks. The stress capital buffer is a measure of capital each firm needs to carry based on the riskiness of their operations. The new regime was supposed to start last year, but the pandemic intervened.

“So long as they stay above that stress capital buffer requirement and all their other requirements every quarter, a bank can technically do whatever it chooses to do with regards to buybacks and dividends,” Jefferies bank analyst Ken Usdin told CNBC this week.

During a background call with reporters, senior Fed officials pushed back against the idea that the new regime resulted in a free-for-all. Banks are still subject to restrictions, and the Fed is confident that the stress capital buffer framework will protect their ability to support the economy during a downturn, they said.

While analysts have said they expect the industry can hike buybacks and dividends by tens of billions of dollars starting in July, the Fed has instructed lenders to wait until Monday afternoon to disclose their plans, according to people with knowledge of the situation. That’s when a flurry of press releases is expected.

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