Growth stocks drive another market swoon

US stocks sold-off on Monday with the S&P 500 finishing down 2.0%.

The bond market was closed in observance of the Veterans Day holiday. Investors remain focused on the same concerns that have been behind the market turbulence of the last six weeks: the sustainability of corporate profit growth, global growth prospects, trade frictions and the impact of higher interest rates. Yesterday's sell-off seems to be related to incremental data points on a few of these fronts.

• In terms of earnings, a supplier to Apple lowered guidance for the quarter based on weaker than expected demand. Investors interpreted this to imply weakness in Apple's smartphone unit volumes. This drove selling in tech (down 3.5% today) and growth stocks more broadly, which have lagged value stocks by 5.5% so far this quarter.
• Trade is also back in focus. News reports suggest that the White House is circulating a draft report over whether to impose tariffs on automobile imports.
• Finally, investors are also concerned about European politics as Italy faces an EU deadline to revise its federal budget and uncertainty about the terms of the UK's exit from the EU continue to linger. The dollar rose today nearly 1%.

Despite yesterday's weakness, we believe the equity bull market remains intact. Companies continue to enjoy favorable access to capital, inflation is not problematic and valuations are becoming more compelling. Leading economic indicators in the US confirm that the risk of a recession in the near-term is quite low and earnings growth should continue, although at a slower rate. While there may be some softness in smartphone volumes, broader tech fundamentals are more healthy, supported by solid enterprise spending as well as secular growth in cloud computing and Internet-related services.

Our bottom line is that the risk-reward trade-off for stocks is attractive given our view that none of the concerns currently weighing on investor sentiment will likely cause a US recession or derail the bull market.

We believe markets are in a bottoming process after the 9.9% drawdown in the S&P 500 from late September to late October. Corrections within bull markets tend to be good buying opportunities, but it is very difficult to perfectly time the bottom. In addition, the 20% decline in the S&P 500 trailing P/E from 21x in late January to 17x today suggests investors have become quite cautious. We note that since 1980, when valuations compress this rapidly, stocks tend to perform well going forward because the market has become overly fearful of the risks.

Our bottom line is that the risk-reward trade-off for stocks is attractive given our view that none of the concerns currently weighing on investor sentiment will likely cause a US recession or derail the bull market. That being said, volatility will likely remain elevated. We are overweight global equities in our House View allocations.

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