By David Randall

NEW YORK (Reuters] – Investors are searching for bargains in beaten down growth and tech stock, hoping they will shine during the Federal Reserve’s fight to reduce the US economy and tame the red-hot Inflation.

Growth stocks – which have trounced their valued-focused peers over the last decade – have borne the brunt of the Federal Reserve’s hawkish turn this year, with the Russell 1000 Growth index down more than 11% year-to-date, compared to a more-than 5% loss for the benchmark .

By contrast, value stocks – often defined as shares of economically sensitive companies trading at a discount to their total worth – are broadly flat on the year.

Underpinning those moves is the perception that the Fed’s fight against inflation will keep interest rates climbing, eroding the future cash flows that growth stocks are heavily valued on. The strong economy, rising commodity prices, and support for value stocks have all helped to keep them in check.

That dynamic could change if the Fed’s tightening monetary policy slows the economy. This would increase the attraction of growth companies for investors who think their profits are more dependent on economic strength. The Fed raised its interest rate by 25 basis point last month, hinting at larger increases in the future.[L2N2W41S3]

The spread between the yields of two- and 10-year Treasuries was briefly negative due to expectations of an aggressive Fed last week. This phenomenon is frequently interpreted as a sign of concerns about economic growth. According to Truist Advisory Services data, six out of seven inversions of yield curves that occurred since 1978 have been followed by recessions.

“If these recession fears grow, then you are going to have a big shift away from value stocks,” said Esty Dwek, chief investment officer at FlowBank, who has been increasing her stake in technology stocks. “Sustainable earnings growth … will become more important again.”

Inversions in yield curves have seen growth stocks outperform value stocks over the past six months. Data from CFRA shows that the Russell 1000 Growth Index has increased by an average 6.4% in these periods, while the gain in value stocks was 4.4 percent. According to CFRA data, growth stocks have experienced an average decline of 0.6% in recessions while value stocks have seen an average decrease of 6.8%.

Russell 1000 Growth Index’s growth rate has increased 320% in the 10 year period, as compared with a rise of 145% for its value-oriented counterpart.

The earnings season begins next week and investors will have a better look at the performance of companies in these times of increasing commodity prices, increased geopolitical uncertainty, and greater geopolitical risk. On Tuesday, the US Consumer Prices Report will be available. The S&P 500 is on track to close down 1% this week, as worries over a more aggressive Fed slow a rally that saw the index pare its year-to-date losses last month. [L2N2W411P]

Invesco QQQ Trust has seen a net $4.2 Billion in investor contributions over the last 3 weeks. That’s the longest period of positive inflows for the fund since January, Lipper data revealed.

Altfest Personal Wealth Management’s portfolio manager Mayukh Poddar increased his exposure in the past to high-growth stocks in the healthcare sector such as Boston Scientific and large-cap tech companies like Microsoft (NASDAQ): in anticipation that Fed’s hawkish tendencies would slow down the economy and hurt value stocks.

He stated that the Fed was telling him that they have made fighting inflation their top priority. The only way to stop that from happening is slowing down demand.

Wall Street has its doubts about growth stocks rebounding, particularly as bond yields keep rising. Recently, the yields on the US benchmark 10-year Treasury hit 2.71%. This is their highest level since 2019

“The period of extremely low interest rates was very good for growth stocks ― and very challenging for value investors,” wrote Tony DeSpirito, chief investment officer, U.S. In a recent note, Blackrock published Fundamental Equities (NYSE:) “The road ahead is likely to be different, restoring some of the appeal of a value strategy.”

Some believe that it’s just about picking the right stocks.

Moustapha Mounah (assistant portfolio manager for James Investment) has decreased his exposure to oil stocks from 12% to 8% while investing in software companies, such as Abobe, SalesForce and SalesForce. This will allow him to increase prices in an era of high inflation.

He stated that “the growth stocks that really are hurting are the speculative ones, but that there are many companies that will be successful regardless of the cycle within the economy.”