Mysterious Ways: Growth vs. Value Debate

Despite some rougher days recently, large-cap, growth-oriented sectors like Communication Services and Technology are still the best-performers this year—up 24.5% and 22%, respectively, through the end of April. Since both tend to get a disproportionate share of attention, and given they house the largest stocks in the S&P 500 (Apple, Microsoft, and Alphabet), it's worth looking at the "health" of both sectors.

Unfortunately, it's not a clean bill. As shown in the chart below, Tech and Communication Services rank poorly when it comes to the percentage of their members reaching a new eight-week high relative to the percentage reaching a new eight-week low. Conversely, a traditional defensive sector, Consumer Staples has much healthier breadth among its members.

A stronger defensive line

While defensive plays have been strengthening—with Utilities and Consumer Staples up 1.8% and 3.4%, respectively, in April—mega-cap heavyweights are still hanging in there. Indeed, Communication Services finished up 3.6% in April, but here's the catch: excluding the two largest stocks in the index (Meta and Alphabet), the sector would have declined slightly.

That speaks to a broader issue that has plagued the market this year, which we highlighted in a previous report. The concentration in outperformance up the cap spectrum has been one of the growing risks for the market and hasn't abated. To be sure, some of the kneejerk reactions by investors in jumping into well-capitalized, large-cap names are justified; given still-looming stress in the banking sector and higher interest rate pressures for small companies. When the generals are on the front lines but the soldiers are lagging behind, battles are harder to win.