Rising interest rates and soaring inflation has helped value stocks in outperforming most of the broader indexes this year. However, their outlook is turning bleak really quickly because of worries of a potential slowdown in the global economy.

Shift in dynamic

Stocks that trade at a discount on metrics like price-to-earnings and book value are defined as value stocks. In the past decade, these stocks have underperformed as opposed to their growth counterparts. This was because the gains in indexes like the S&P 500 were mostly driven by tech giants like Apple Inc. and Amazon.com Inc.

However, this year saw that dynamic shift, as the US Federal Reserve began its rate hike cycle after 2018. This ended up hurting growth stocks disproportionately, as they tend to be sensitive to higher rates. There has been a 13% decline in the Russell 1000 value index in year-to-date, while a 26% decline has been recorded in the Russell 1000 growth index.

Outlook shifts

But, the outlook shifted once more this month because of fears that the monetary policy tightening from the US Federal Reserve could trigger a US recession. Hence, value stocks saw the momentum shift once more, as they are more sensitive to economic performance. In July, there was a 0.7% increase in the Russell 1000 value index, as opposed to its growth-stock counterpart recording a gain of 3.4%.

Market analysts said that whether the economy is in a recession, or is going into one, it does not bode well for value stocks. The shift towards growth stocks shows how investors are making adjustments to their portfolios because of a possible economic downturn.

Corporate earnings

The corporate earnings session is also scheduled to begin this week and this will provide investors a better idea of the impact of soaring inflation on the bottom line of companies. Amongst those that will be leading the deck includes Tesla, Johnson & Johnson, and Goldman Sachs.

Value stocks have been able to record benefits for most of the year due to broader market trends. About 7% of the Russell 1000 value index comprises energy stocks, which soared in the first half of the year. This was because of a rise in oil prices because Russia’s invasion of Ukraine exacerbated the supply shortage.

However, recent weeks have seen crude prices and energy shares, along with other commodities, fall because of concerns about falling demand if a recession happens. Bank stocks will also take a hit because of the recession, as loan growth will hurt and credit losses will rise. Almost 19% of the value index comprises financial shares.

But, bank stocks got a lift on Friday because of a positive update from Citigroup, as there was a 5.76% gain in the S&P 500 banks index. Moreover, growth companies, such as tech, are also capable of weathering a broader slowdown in the economy because their businesses tend to be less cyclical. Analysts said that growth stocks could make up the ground they had lost.