The growth trade is back in vogue for now, Ned Davis Research says

Ned Davis Research recommends overweighting growth stocks relative to value, citing reduced market volatility and the correction of overvaluation in "Magnificent Seven" stocks following the easing of trade tensions. The firm is shifting its U.S. asset allocation, moving 5% from bonds to stocks, resulting in a portfolio of 60% stocks, 30% bonds and 10% cash. While noting the potential for market susceptibility to negative news, the firm highlights the strong rebound of growth stocks like Nvidia (+29%) and Meta Platforms (+18%) since early April.

Analysis

Ned Davis Research (NDR) advocates for a strategic shift towards growth stocks over value stocks, predicated on the market's return to normalcy, evidenced by the Cboe Volatility Index (VIX) trading around 17, significantly down from its April 7 peak of 60.13. This improved sentiment follows a sharp market recovery, with the S&P 500 approximately 3% below its February all-time high, after President Trump paused many tariffs unveiled on April 2, alleviating concerns of a tariff-induced recession. Consequently, NDR has adjusted its U.S. asset allocation recommendation, moving 5% from bonds to stocks, resulting in a 60% stocks (5% overweight), 30% bonds (5% underweight), and 10% cash (marketweight) portfolio. The rationale for favoring growth stocks, particularly the "Magnificent Seven," is twofold: the expectation of strong earnings expansion and the recent correction that has reportedly removed their relative overvaluation, which was a concern at the beginning of the year alongside slower earnings growth. Since April 2, these growth-oriented stocks have demonstrated significant rebounds, with Nvidia up 29%, Meta Platforms 18%, and Microsoft 21%. However, NDR's chief U.S. strategist, Ed Clissold, injects a note of caution, highlighting that market sentiment, while currently neutral, is nearing an 'excessive optimism zone' according to the NDR Daily Trading Sentiment Composite, making the market susceptible to negative news and sudden shifts in risk appetite.

Key Decisions for Investors

• Investors should consider re-evaluating their portfolio allocation, potentially increasing exposure to equities, specifically growth-oriented stocks, in line with Ned Davis Research's recommendation to move to a 60% stock allocation.
• Focus may be warranted on growth stocks, including the 'Magnificent Seven' (Nvidia, Meta, Amazon, Alphabet, Apple, Tesla, Microsoft), which have shown strong recent performance and whose valuations are now considered less stretched post-correction.
• Maintain vigilance regarding market sentiment and macroeconomic news, as the market's proximity to 'excessive optimism' suggests heightened sensitivity to adverse developments, which could rapidly alter risk perceptions.