Jonathan Pinsler, senior vice-president and portfolio manager at TD Wealth Private Investment Advice, poses the question: Should investors focus solely on hyper growth stocks or have a balanced portfolio of both GARP (growth at a reasonable price) and hyper growth stocks?
The current market trends, particularly in the technology sector, have been dominated by growth stocks over the past 18 months. Despite some exceptions like Dollarama, Costco, and Eli Lilly, growth stocks continue to thrive with favorable conditions and rich valuations. The uncertainty surrounding the next U.S. interest rate move, which is expected to be lower, could further support the high valuations of growth stocks. While the U.S. Federal Reserve may be slow in recognizing economic weakness, other central banks like the Bank of Canada and European Central Bank have already started cutting rates.
However, there are warning signs in the market:
– Excessive optimism among investors
– Increased insider selling of large growth stocks
– Market volatility, especially in big tech names
– Companies needing to deliver on growth promises
– Challenges in the software industry, with AI spending crowding out Software as a Service companies
The current market situation bears similarities to the late 1990s tech bubble, with a narrow market advance driven by a few large companies, high expectations of growth, and an initial infrastructure build-out. Unlike the dot-com bubble, today’s tech leaders have real earnings and cash flow.
Economic indicators point towards a slowdown, with weakening consumer confidence, slowing job growth, declining retail sales, and rising business bankruptcies. There are also signs of potential disappointment in the AI sector, with a declining proportion of companies planning to increase AI spending and high costs of AI infrastructure compared to current profits.
While technology growth stocks continue to benefit from favorable conditions, investors should be cautious of potential risks and high market concentration. A balanced portfolio that includes both high growth and reasonably priced companies with strong fundamentals may provide a better reward to risk profile. The Hyper Growth vs GARP debate could become more interesting as market dynamics potentially shift. In uncertain times, having a mix of high growth and defensive value stocks can help navigate towards financial goals.