Investing.com -- Barclays (LON:BARC) strategists maintained a positive view on US growth and large-cap stocks versus value and small-caps.
While acknowledging more risks since their last analysis, the preference for growth stocks remains thanks to steady macroeconomic data and a strong US economy, which has seen domestically focused stocks double the performance of those with significant international sales over the past year.
However, concerns such as trade war fears, reflation, and rising consumer anxiety, as indicated by a six-month low in the University of Michigan's consumer expectations, could impact market dynamics.
The US economy's resilience is evident in the outperformance of domestically focused stocks, delivering a 16% return compared to an 8% return for those with high international sales.
Nevertheless, policy changes in tariffs and immigration could alter the balance between growth and value stocks. While rising yields may favor value stocks, trade tensions could benefit domestically focused stocks, which have a higher domestic exposure.
When it comes to the impact of interest rates and earnings growth, Barclays notes that with only one Federal Reserve rate cut anticipated in 2025, the relative advantage to growth stocks from falling interest rates is less pronounced.
Still, the firm expects earnings per share (EPS) growth to remain concentrated in the technology sector, which could continue to favor growth stocks.
The investment bank also reiterated a positive view on large-caps, citing their better performance compared to small-cap stocks year-to-date. Despite small-caps seeing a 2.2% increase, they still trail the broader market by 200 basis points.
“The losses post the election rally have now fully reversed,” Barclays strategists led by Venu Krishna said in a note.
“We believe the initial exuberance around small-caps was driven by expectations around Trump's "America First" policies, given their higher domestic exposure, alongside deregulation and M&A hopes,” they added. “However, higher yields have tempered gains, despite attractive valuations.”
They outlined several reasons for skepticism towards small-caps, including a weaker link between domestic growth and the US dollar, stronger profitability and better near-term earnings revisions in large-caps, and limited gains from artificial intelligence productivity improvements.
Furthermore, small-caps are facing higher debt burdens and refinance risks, with a historically high number of unprofitable companies within the Russell 2000 index. The low public listing activity of private companies also limits growth opportunities for the small-cap index from new entrants.