Value stocks are trading at a record discount, and according to one expert strategist, that could mean a massive summer rally is coming for the group.
“We’re seeing a pretty massive gap that opened up between growth, low vol, high momentum stocks relative to value,” said Dubravko Lakos, head of U.S. equity strategy at JPMorgan. “When you look at valuations, for us the basket is blown out to not just cycle highs, but record highs.”
JPMorgan tracks a basket of 100 stocks that have been selected based on their low price-to-book value, price-to-earnings ratio, and price-to-sales ratio, among other indicators. And according to Lakos, this basket of stocks are trading at their cheapest valuations ever, as well as their largest discount to the market in decades.
“Value is now trading at about seven times discount versus the market. Last time we saw it was basically year 2000 at the peak of the TMT growth bubble,” Lakos said. “You’re seeing a lot of these correlations also between value stocks and the flip-side, momentum, hitting extreme negatives. So, you have basically a situation that we think is ripe for potential rotation.”
But before a bigger rally into value stocks starts, Lakos is looking for two catalysts.
“One potential catalyst is… the Fed that basically embarks on some potential rate cuts which is part of our house view going into the second [half of the] year,” he said.
Lakos also noted that if there’s a resolution to the trade war, which has rattled markets in recent months, that should also spur a rally in value stocks.
He says that these two catalysts could see the bank’s value basket spike an average of 20% to 30% within just three months.
However, Lakos believes a longer-term bet on value stocks is still up against some headwinds, and until those headwinds are resolved, a play on value stocks should be short term.
“Rates are very low and that’s … ignited a lot of these different growth companies, growth projects that investors are chasing,” Lakos said.
“Value characteristics from a fundamental point of view are no worse than what they were in previous cycles—if anything, in some cases they’ve slightly improved—but it’s the other side of the trade, the growth trade, that has possessed extremely strong quality properties for much longer than what we’ve seen historically.”
Considering that, investors may be less likely to give up on riskier, high-reward, growth trades to shift back into value stocks for the long term.