A shift away from current growth paths is less sustainable, but presents opportunities - Macquarie

According to a report by Macquarie Desk Strategy, the rotation from current growth stocks to business cycle stocks may not be sustainable, but it could provide an opportunity for future winners.

Strategists believe that since the pandemic, the two elements of value stocks and business cycle stocks have risen, and relative valuation and quality and growth stocks have also risen, and deflation is currently expected in the US, and “investors are beginning to anticipate a stronger and more synchronized recovery, depreciation of the US dollar, and appreciation of the yen in the latter half of '25,” so the market is ready for rotation into value stocks and business cycle stocks, the strategist's Viktor Schbetz wrote.

He stated that in recent sessions, rotation was seen from growth stocks, and support for business cycle emerging markets (EEM) and value stock styles should be strengthened.

“The key question is how strong and sustainable this rotation is, and whether long-term investors should largely ignore it.”

As a reason why the team is not concerned about the high degree of market concentration, he said, “While time required to create megacaps (NVDA) and (MSFT) is shortened in the modern world where capital is abundant and marginal prices of capital and technology are falling, the destruction of other companies that were far more conventional and are now becoming much more conventional and potentially small-scale enterprises (AAPL), (CSCO), and (IBM) is accelerating.”

In the past, this process would have taken decades, but now it can be accomplished in a few years, or even a few quarters, he added. “If management makes one or two right decisions about product positioning and how to utilize technology and capital, there is a possibility that any stock can quickly be pushed to new highs.”

But even for companies with high profit margins, small tipping points can be “severely punished,” and “all profits go to the winners, leaving very little to others.”

The good news is that other companies that profit from lower marginal costs may increase in value and eventually change the winner mix.

“In a world rich in capital and technology, is there room for value and circularity? “The answer is no,” Schbetz says. “Even if there is a period of average regression, trading opportunities will arise.”