Morgan Stanley Warns Growth Stock Underperformance Just Starting

(Bloomberg) — Lagging returns from U.S. growth stocks, recently surpassed by their value peers, mark only the start of a longer-term move, according to Morgan Stanley (NYSE:).

The shift favors an overweight position in financials, consumer staples and utilities, said Michael Wilson, the bank’s chief U.S. equity strategist. The S&P 500 Value Index has returned about 5% since the start of August compared with the 0.9% for the S&P 500 Growth Index.

“The bottom line is that the winds of change are upon us,” Wilson wrote in a report Sunday. “The long-overdue adjustment process for the most expensive secular growth stocks is under way and will likely continue until valuations become so cheap that they discount a more achievable outcome on growth and profitability and/or the risk of economic recession and lower capex subsides. I don’t think we’re there yet on either score.”

It’s a debate that’s captivated stock pickers for years and is dividing Wall Street. Unless the economic outlook changes materially, Goldman Sachs Group Inc (NYSE:). strategists said this month they prefer growth over value, commonly defined as those trading cheap to fundamentals.

While the S&P 500 Index approached a record high on Friday, some growth shares have been underperforming, and Morgan Stanley highlighted software companies in particular. The S&P North American Expanded Technology Software Index is down 7.7% from its record reached on July 26. The gauge has surged 97% since the end of 2016 — more than double the S&P 500.

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