You should be skeptical of the growth story that periodically captures stock investors’ attention. That’s because the companies that Wall Street believes will grow the fastest in the future rarely live up to the lofty expectations investors put on them. The latest of bout of this growth-stock fever occurred this week. On Wednesday, after Federal Reserve Chairman Jerome Powell hinted that the Fed would slow the pace of future rate hikes, investors jumped on the growth bandwagon. The SPDR S&P 500 Growth ETF
gained 4.3% in that day’s session, far outpacing the 1.9% return of the SPDR S&P 500 Value ETF
Meanwhile, Invesco QQQ Trust
which is heavily weighted with tech stocks that in essence are growth stocks on steroids, gained even more, 4.6%.
On the surface, investors’ reaction makes a certain amount of sense, since the present value of future years’ earnings increases as interest rates decline. Since a greater share of growth stocks’ earnings than value stocks’ earnings traces to future years, growth stocks should benefit disproportionately when rates decline. Or so the growth stock rationale goes. The Achilles’ Heel of this rationale is the assumption that growth stocks’ earnings will actually grow faster than for value stocks. More often than not, this isn’t the case. This is difficult for investors to accept, since growth stocks are often those whose trailing years’ earnings growth has been well-above average. But just because a company’s past earnings have grown at a brisk pace doesn’t mean they will continue growing at that pace in the future. We should actually expect that earning …