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Morgan Stanley Warns Growth Stock Underperformance Just Starting

The long-overdue adjustment process for the most expensive secular growth of U.S. stocks is under way.

Morgan Stanley Warns Growth Stock Underperformance Just Starting
A Wall Street street sign is displayed near the New York Stock Exchange (NYSE) in New York, U.S. (Photographer: Michael Nagle/Bloomberg)

(Bloomberg) -- Lagging returns from U.S. growth stocks, recently surpassed by their value peers, mark only the start of a longer-term move, according to Morgan Stanley.

The shift favors an overweight position in financials, consumer staples and utilities, said Michael Wilson, the bank’s chief U.S. equity strategist. The S&P 500 Value Index has returned about 5% since the start of August compared with the 0.9% for the S&P 500 Growth Index.

“The bottom line is that the winds of change are upon us,” Wilson wrote in a report Sunday. “The long-overdue adjustment process for the most expensive secular growth stocks is under way and will likely continue until valuations become so cheap that they discount a more achievable outcome on growth and profitability and/or the risk of economic recession and lower capex subsides. I don’t think we’re there yet on either score.”

Morgan Stanley Warns Growth Stock Underperformance Just Starting

It’s a debate that’s captivated stock pickers for years and is dividing Wall Street. Unless the economic outlook changes materially, Goldman Sachs Group Inc. strategists said this month they prefer growth over value, commonly defined as those trading cheap to fundamentals.

While the S&P 500 Index approached a record high on Friday, some growth shares have been underperforming, and Morgan Stanley highlighted software companies in particular. The S&P North American Expanded Technology Software Index is down 7.7% from its record reached on July 26. The gauge has surged 97% since the end of 2016 -- more than double the S&P 500.

To contact the reporter on this story: Adam Haigh in Sydney at ahaigh1@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Andreea Papuc

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