Is Exxon the new ‘FANG’? The value rotation is starting to look more real
The great rotation: This time, it might be real. Value buyers have been waiting for a sustainable rally for so long, many have moved on to other quests. But events in the last few weeks give value players a lot to cheer about. “Exxon is the new FANG,” has been a quip on trading desks for the past few weeks. Indeed, Exxon is at an historic high, and its brethren Chevron is the top performing stock on the Dow this year, with a 52% gain. Sectors normally associated with value (energy, industrials, health care, financials) have notably outperformed those associated with growth (technology, communication services) over the past month: S & P 500 sectors (October) Energy, up 23% Industrials, up 12% Financials, up 10% Health care, up 8% Technology, up 4% Communication services, down 1% Value vs. growth (October) S & P Value (IVE), up 10% S & P Growth (IVW), up 3% This type of rotation, while rare in the last few years, is ultimately good for the market. “A lower Big Tech weighting is ultimately good for the S & P 500, as it allows other sectors to have more of an impact on index returns,” said Nicholas Colas of DataTrek in a note to clients. What happened to tech this year? Ultimately, it’s always about earnings. Is the direction of earnings up or down? As the year has gone on, the direction of earnings growth has decelerated for big-cap tech — in some cases dramatically. This was not the case for the last few years. Colas noted that despite the fact that big cap tech stocks are underperforming the S & P 500 this year (the lone exception is Apple , which is holding on to a 1.6% gain), most are outperforming the S & P if viewed from the slightly longer perspective of the start of 2020. S & P 500 since 2020: Up 18% Apple, up 97% Microsoft, up 44% Alphabet, up 38% Tesla, up 70% N Nvidia, up 124% The two exceptions: Meta, down 52% since the start of 2020, and Amazon, now flat. What accounts for this outperformance? Big-cap tech had much higher growth rates than the rest of the market over the past few years. The S & P 500 had a compounded annual growth rate of 11% from 2019-2022, but Big Tech did much better, with Apple, for example, up 27%, Microsoft 19%, Alphabet/Google up 25%, and Nvidia up 14%. This is now reversing. The expected CAGR for tech is slowing considerably, Colas said. Apple’s CAGR for the next year is expected to be only 6%. Expectations are 6% for Microsoft, 14% for Alphabet and 7% for Meta. Only Nvidia is expected to outperform, with a predicted 37% gain. “2022’s pandemic era earnings growth rates are proving to be unsustainable, so markets are revising their estimate of fair value for these stocks,” he said. True, all are seeing earnings growth, just not as fast as expected a couple years ago. “Accelerating growth earns higher valuations, and decelerating growth forces valuations lower. Wall Street has a very short menu,” Colas noted.