Disruptive growth stocks are getting ample attention into the end of 2021, but more traditional growth fare delivered again this year. With just a few trading days left in the year, the S&P 500 Growth Index is up 30.62% – an advantage of more than 1,000 basis points over its value counterpart.
Undoubtedly, that's an impressive performance when considering the combination of rising Treasury yields in the first half of 2021, multiple variants of the coronavirus emerging and persistent issues in the global supply chain.
As is often noted, factor performance isn't guaranteed to repeat, but the strength in large-cap growth is hard to ignore. Growth's stellar run now stretches over a decade and some market observers believe it can continue in 2022. They could be on the money with that prediction because as the economic cycle matures and moves into expansion, GDP growth is likely to slow, potentially compelling asset allocators to embrace stocks with higher rates of earnings growth.
Good News for Growth
After 2021, it's understandable that advisors are tired of hearing about inflation, but rising consumer prices could pave the way for more upside with growth equities and the related funds.
“Our expectation is that this wage inflation will create some headwinds on margins for companies without pricing power; however, this should be offset by higher levels of general spend within the economy,” says Janus Henderson portfolio manager Doug Rao. “We believe that in either an inflationary or deflationary environment, one of the most important business attributes to have is pricing power; thus, we think it is important to invest in companies with the ability to raise prices as they see fit.”
Looked at in terms of familiar growth fare, companies like Apple (NASDAQ:AAPL), Google parent Alphabet (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT), among others, those companies can (and do) raise prices against inflationary backdrops. Operating in near monopoly fashion has its perks and those benefits do accrue to investors.
Adding to the allure of mega-cap growth stocks heading into 2022 is the strong balance sheets found throughout the group, which pave the way for these companies to continually reinvest in their operations, generating more growth.
“We can compare forecasted capital expenditures (capex) ‒ which include investment for future growth projects ‒ for a stock in the energy sector with several growth-oriented stocks,” adds Rao. “While ExxonMobil is expected to invest a significant $22 billion in capex in 2022, Amazon is expected to spend $46 billion, with a number of other growth-oriented companies expected to spend $28 billion or more.”
Growth As a Buffer
Another benefit of many mature growth titans is that due to the robust menu of quality traits these companies sport, the stocks have become favored destinations of advisors and clients when broader market volatility increases.
Looked at another way, deflation or inflation, high or low volatility, the case for familiar growth names remains in tact heading into 2022.
“So, while the threat of inflation does exist, equities with free-cash-flow yields that are higher than other asset class yields, combined with the potential for significant free-cash-flow growth, appear attractive on a relative basis,” concludes Rao. “We think that companies with promising reinvestment opportunities, trusted relationships with their customers and some degree of pricing power can remain effective, regardless of whether we are investing in an inflationary or deflationary environment.”