Here's why we think the growth story will continue Here's why we think the growth story will continue January 10 2019

Here's why we think the growth story will continue

Growth stocks continue to benefit from a robust earnings, a solid economy, tax reform and IPOs.
Published September 25 2018
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There are fundamental reasons why growth investing has outperformed over the past several quarters and, given the five following reasons, we don’t see signs of a reversal anytime soon.

  1. Earnings growth continues to be the primary driver for the market going higher. Driven by sales growth, earnings growth has been and is expected to remain elevated at double-digit rates for the next three to six quarters. Also, now that the Federal Reserve’s rate normalization is in full swing, it’s worth remembering that companies with the ability to substantially grow earnings typically aren’t as impacted by rising rates relative to slower-growing companies.
  2. Gross domestic product is accelerating. As investment picks up across the economy, GDP has moved from a 2% run rate over the past eight years to 3%. Historically, solid GDP rates that stay below 4% (which keeps a check on inflation) bode well for growth stocks.
  3. Positive tax impacts and investments. The most exposed sectors to the repatriation of capital due to tax reform (estimated at approximately $3 trillion) have been growth sectors such as Health Care, Technology and Consumer Discretionary. While most of that capital is staying in these sectors, which will support P/E multiples, we’re also starting to see a pickup in investment. Specifically, 40% of capital expenditures is being made on software and automation products and services as many industries look ahead to mitigate future labor shortages and wage increases.
  4. IPOs are booming. With the equity markets thriving and debt markets becoming incrementally more expensive, the initial public offering market is soaring. So far in 2018 there have been 145 IPOs in the U.S., a majority in the growth-oriented Tech and Health Care sectors. We expect this momentum to continue in 2019.
  5. Growth sectors keep growing. Finally, it’s important to acknowledge that many growth sectors—particularly Tech, Health Care and its biotech industry segment—increasingly are significant components of both U.S. and global economies. Regardless of the economic environment, their substantial market and economic weight is unlikely to change and will continue to drive growth investing.
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Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Investing in IPOs involves special risks such as limited liquidity and increased volatility.

Price-earnings multiples (P/E) reflect the ratio of stock prices to per-share common earnings. The lower the number, the lower the price of stocks relative to earnings.

Federated Investment Management Company