It is impossible even to talk about the long bull market that ended in January 2022 without saying high-growth tech stocks propelled the market higher.
Companies like Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft, Netflix, Nvidia and Tesla dominated the headlines for years. Tech stocks and growth stocks were virtually synonymous.
But not anymore.
The new growth stocks, in the estimation of S&P Dow Jones Indices, an influential market analysis firm, now include fossil-fuel energy companies.
The world has changed radically in the last year or two, and traditional categories, like growth and value, are topsy-turvy.
S&P Dow Jones Indices handles the plumbing behind the two most famous American stock market indexes — the S&P 500 and the Dow Jones industrial average — and many other important world market benchmarks.
In an annual review of the S&P 500 index, it has found that the seemingly immutable connections between tech and growth, and between energy and value, in the stock market have weakened, if not snapped entirely.
The Findings
Investors have often viewed growth and value stocks as two essential categories. Basically, growth stocks promise a lot in the future but deliver less right now. Value stocks, on the other hand, aren’t usually trendy. They are priced well below what their advocates consider to be their real worth.
But which stocks belong in each category? The answer seemed obvious, until the stock market collapsed in 2022. The prices of tech companies were shriveling, and they pulled the entire market down.
Now, using strictly mathematical measures, S&P Dow Jones Indices has found that Alphabet (Google), Amazon, Meta (Facebook) and Microsoft are no longer “pure growth” stocks. They have been replaced in the S&P 500 Pure Growth Index by an unlikely group: fossil-fuel companies like Exxon Mobil and Chevron.
These conclusions are a startling sign of how much the world and its financial markets have been battered in the last year or two.
Until the S&P Indices findings, for example, Exxon and Chevron had been almost universally classified as value stocks. In the thinking that prevailed a couple of years ago, an urgent need to address global warming impaired the long-term viability of fossil fuel companies. Even among investors who favored their shares, these firms were presumed to be a good value precisely because they were so unfashionable.
Last year, at least, those assumptions about growth and value stocks were overturned, along with many other presumptions about the world.
The World Changed
Russia’s yearlong war in Ukraine set off a series of unanticipated shocks that elevated world oil and gas prices. Energy prices have come down a bit, but still remain high.
Publicly traded energy companies had outsize gains in sales, profits and stock prices. Exxon and Chevron have both reported record profits for last year. The S&P 500 dropped more than 18 percent in 2022, but energy was the only sector to rise, with an eye-popping total return of almost 67 percent, including dividends. The sector’s sales, price and earnings momentum transformed its biggest components into growth stocks, at least in the backward-looking lens used by S&P 500 Indices.
At the same time, the eight big tech companies stumbled, for idiosyncratic reasons, as well as systemic ones. Tesla, for example, faces serious competition in the market for electric vehicles, even as the Twitter escapades of its proprietor, Elon Musk, may be turning off some would-be car buyers. Meta reported a continuing decline in sales and earnings on Wednesday, though its stock soared on plans for further share buybacks, amid a broad stock market rally fueled by hopes that the Federal Reserve’s interest rate increases were abating. Still, the scale of its unprofitable investments in virtual reality have worried many investors. Netflix, which once said it competed only with sleep for the attention of its subscribers, now jousts with a horde of streaming companies.
But, in broad terms, two real-world factors are responsible for their reclassification this year. First, while the initial, lockdown phase of the Covid-19 pandemic generally increased tech firms’ sales and profits in 2020 and 2021, it set them up for a sharp decline in their growth rates in 2022 as the economy recovered.
Second, soaring inflation and rising interest rates — the Fed raised short-term rates again on Wednesday — hurt the tech companies, too. Why? Basically because tech companies that entice investors with the mere promise of future sales and profits are worth less when the costs of waiting for those promises rise.
In short, the abrupt reversal of the eight big tech companies’ momentum last year changed their profiles, according to the S&P Indices algorithms. Now, the S&P 500 Pure Growth Index includes just one: Apple. Despite periodic setbacks like the decline in sales and earnings it announced on Thursday, it has for the most part kept growing.
How are the others classified? The answer isn’t simple. Alphabet, Amazon, Meta and Microsoft now reside in both of the two, more inclusive, S&P 500 growth and value indexes: subsets of the S&P 500 that welcome stocks near the middle of the growth-value spectrum. Netflix, Nvidia and Tesla are only in the broad growth index, implying that they have retained more growth characteristics than Alphabet, Amazon, Meta and Microsoft.
The shifts are dizzying. They amount to a wholesale transformation of nearly a third of the market weight of the S&P 500 growth and value indexes. “That’s the biggest turnover since the start of current measurement methods in 2009,” Hamish Preston, director of U.S. Equity for S&P Dow Jones Indices, said in an interview.
The Implications
In decision-making, it helps if you know what you’re talking about. But when it comes to growth and value stocks, it’s not easy to know.
Growth funds based on the S&P 500 indexes now contain fossil-fuel energy stocks, and if you thought that by holding those funds you were owning tech stocks, you may be disappointed. Funds based on other indexes, like the Russell 1000 Growth index, haven’t yet rebalanced their holdings this year, and they still look more like traditional growth stock funds. Buyer beware.
Be careful in evaluating the horse races that have gone on for decades. Depending on the index, a stock that had been a growth champion may suddenly be running under the livery of value. These shifting labels raise questions, to say the least, about the enduring worth of such distinctions.
At the level of individual companies, finer distinctions can be made. There is a well-tested, disciplined value-investing approach used in analyzing stocks, one taught by Benjamin Graham at Columbia, and practiced by his star student, Warren Buffett.
But unless you make a living with this method, I’d say that this year’s exercise by S&P Indices is invaluable in pointing out the pitfalls of choosing value or growth or any sector in broad bets on the markets. If fossil fuel energy stocks are growth companies in a warming world, what do those words even mean?
As an investor, I try to sidestep such judgments entirely. You can do that, too, by owning a piece of the entire stock and bond markets through broad, low-cost index funds that don’t give a greater weight to one style or sector. If you have enough money to pay the bills, just let these investments mature over decades.
With that approach, you can observe the ever-changing spectacle of the markets without worrying about their sometimes tenuous relationship with common sense.
For my own peace of mind, I don’t worry about shifting growth and value distinctions. I hold the entire market, and get on with other things.
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