Trump’s Return: A Favorable Outlook for Growth Stocks

With the political landscape evolving and Donald Trump’s potential return as president on the horizon, quantitative strategists at Jefferies are projecting a positive outlook for growth stocks. In a recent report, they suggest that during the initial phases of Trump’s second term, investors should steer clear of value stocks in favor of growth-oriented investments.

Understanding the Distinction: Growth vs. Value Stocks

To navigate the stock market, investors often categorize stocks based on different metrics, such as sector, market capitalization, and investment style—namely, growth or value. Growth stocks are characterized by companies that have exhibited substantial increases in revenue and earnings, often leading to higher price momentum and trading at elevated valuations compared to their earnings or book value.

Conversely, value stocks typically belong to more established companies with slower growth trajectories, predominantly in cyclical industries. These stocks are generally traded at lower valuations relative to earnings or book value and may attract investors interested in steady dividend payouts.

Jefferies’ Position on Growth Stocks

Desh Peramunetilleke, the global head of quantitative strategy at Jefferies, emphasizes the expectation of a repeat of Trump’s first term, which he describes as “a tale of two halves.” According to Peramunetilleke, growth stocks outperformed in the early stages, while quality and low-risk stocks became more prevalent later on. He asserts that as the U.S. economy approaches a “normalization” period, growth stocks are poised to outshine cyclical investments and value stocks.

“Lower global trade growth and a cap on oil prices are likely to drag down commodities, cyclicals, and value stocks,” Peramunetilleke notes. He points out that growth stocks are currently trading at roughly a 20% discount compared to their five-year peak relative to price-to-earnings (PE) ratios, indicating strong buying potential.

Screening for Growth Stocks

To identify potential investment candidates, analysts often utilize the S&P 500 Growth Index—a tool that groups stocks based on growth metrics. The S&P Dow Jones Indices assigns each company both a growth score and a value score based on various factors, including:

• The three-year change in earnings per share (EPS), divided by current price.
• The three-year sales-per-share growth rate.
• Momentum, based on the 12-month price change.

As a result, about 34% of the S&P 500 stocks end up in a blended index, which possesses characteristics of both growth and value. Currently, the S&P 500 Growth Index features 233 companies, whereas the value index comprises 437 companies, highlighting the larger presence of value stocks within this index.

The S&P 500 Pure Growth Index: Focus on Pure Growth Stocks

For investors interested in a more precise classification, the S&P Dow Jones Indices also maintains the “pure” style indexes. The S&P 500 Pure Growth Index contains 66 stocks with no overlap with value stocks, weighted strictly by their growth scores. Investors can also consider holding shares in the Invesco S&P 500 Pure Growth ETF (RPG), which provides exposure to this growth-focused segment.

Top Growth Stocks with High Upside Potential

Based on consensus price targets from analysts polled by FactSet, here are ten stocks from the S&P 500 Pure Growth Index that currently hold majority buy ratings and possess the highest 12-month upside potential:

Conclusion

As Donald Trump’s potential return to power looms, the stage seems set for growth stocks to flourish once again. With Jefferies’ bullish outlook on this sector and a promising selection of stocks with high upside potential, investors may find it prudent to reevaluate their portfolios in favor of growth-oriented investments during this critical juncture.