- A rise in interest rates has helped fuel an extreme rotation into reopening stocks at the expense of high-growth technology stocks.
- According to JPMorgan, valuations in cyclical stocks have become stretched, suggesting that the bulk of the rally "might be behind us."
- These are the factors that will tell investors when to start buying tech stocks at the expense of value stocks, according to JPMorgan.
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A violent rotation out of technology stocks and into cyclical stocks poised to benefit from a full reopening of the US economy has some investors asking when to take profits in value and pile back into growth, according to a Monday note from JPMorgan.
The bank outlined factors investors should monitor to signal the optimal point of buying tech stocks at the expense of the value stocks that have worked so well recently.
Driving the reopening trade higher has been a surge in interest rates, with the 10-year US Treasury note hitting a 13-month high on Friday of 1.64%. JPMorgan thinks the move higher in yields is not yet exhausted, even as the Fed is likely to push back on rising rates. Until interest rates begin to turn lower, the reopening trade should continue to work.
From an economic standpoint, the outperformance of growth stocks relative to value stocks will likely resume once again when country Purchasers Managers Index, or PMI, peak. According to JPMorgan, China momentum is "potentially peaking," while the US is approaching highs.
"The general growth backdrop is likely to be firm into summer," JPMorgan said.
Also helping cyclical stocks maintain its momentum over growth stocks is the acceleration of earnings, which should continue over the next few quarters. "As long as cyclicals EPS is faster than for defensives [and tech], they tended to hold onto their gains," JPMorgan explained.
"Put together, the size of the cyclicals run, and their stretched valuations, likely suggest that the bulk of the move might be behind us," JPMorgan said before adding, "Still, we think it is premature to position for an actual reversal."
Investors should position for a reversal out of cyclical stocks and into high-growth tech stocks once country PMIs begin to peak, relative earnings begins to fade, and as interest rates stop rising and instead begin falling, according to JPMorgan.