(Bloomberg) -- The stock market's slim leadership shouldn't worry investors, but the type of leaders should.
Growth stocks -- companies with the strongest expected and realized sales and earnings -- have been this year's big winners, gaining the most out of the five global factors tracked by Societe Generale SA. Outsize gains in growth stocks isn't unusual this late in an economic cycle because investors flock to companies with established track records assuming newcomers may struggle if the economy turns sluggish.
The problem with growth -- now one of the most expensive in the market -- is that holding onto them too long can lead to outsize pain if the market turns lower, according to Andrew Lapthorne, the bank's head of quantitative strategy.
“Growth is typically favored as the economic cycle enters its twilight years. The difficulty is getting out before the downswing, as growth tends to suffer most in down markets,” Lapthorne wrote in a note to clients Tuesday. “Given that it is now the most expensive of all the factors, this is all the more critical.”
The dominance of growth stocks is especially apparent in the U.S., according to Lapthorne. For instance, Facebook Inc. and Amazon.com Inc.'s double-digit earnings expansion make them the first and third biggest growth names in the S&P 500 Index, according to data compiled by Bloomberg. They are also the second and fourth biggest contributors to the gauge's gains this year.
Though the growth factor advances an average 27 percent in late business cycles, it plunges 37 percent during recessions, data compiled by Societe Generale show. That compares to a 11 percent decline for the overall market during recessions.
To contact the reporter on this story: Dani Burger in New York at dburger7@bloomberg.net.
To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Randall Jensen, Eric J. Weiner
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