It Might Be Time to Sell Amazon and Other Growth Stocks

There has been a surge in the growth stocks market this year, outpacing the broader market. Prior to continuing their outperformance, they will need to take a pause and take stock of the situation. 

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There has been a modest increase in the Russell 1000 Growth Index this year, compared to the S&P 500's roughly 2.5% gain for the same period. During the first half of this year, Amazon.com AMZN -0.04% (ticker: AMZN) and Visa V +0.32% (V) have gained about 6% and 5%, respectively, both of these companies are constituents of the growth index.

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As a matter of fact, they are almost pure growth companies. Currently, Amazon's e-commerce business has more room to grow than traditional retail, and its cloud-computing business is among the leaders when it comes to new ways that businesses can store and use data. Amazon has a lot of room to grow its e-commerce business. It has been reported that Visa's credit-card and digital offerings continue to take market share from cash transactions.  

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FactSet estimates that over the next three years, Amazon's earnings per share will compound at a rate of almost 50%, on an annual basis, according to analysts. During the same period, Visa's EPS is expected to grow by 13%, a figure which is comfortably above the 8% aggregate figure for companies in the S&P 500 SPX +0.76% which is expected to grow by 8%.  

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There was a decline in interest rates early in the year that sparked a fire under growth stocks. Rates of interest that are lower create a discount on the current value of future earnings that will be received in the future. The fact that those shares are priced to reflect the profits that will roll in over the next few decades makes a very large difference for companies whose profits are growing rapidly.

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Bond rates in the bond market fell to start the year because investors expected that the Federal Reserve would stop raising interest rates at least temporarily, as inflation is declining, and as a result interest rates would stay low. There is, however, a problem now that inflation appears to be stubbornly high, which has raised expectations that the Fed will be raising rates by as much as half a percentage point at the next meeting of its policy-setting committee on March 21 and 22.

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Since rates have taken off again, the outperformance by growth may turn out to be little more than a head fake, as the growth may not be able to keep up.

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It shouldn't come as a surprise to anyone. Since the beginning of 2021, the Russell 1000 Growth Index RLG +0.81% has underperformed its slower-growing value counterpart, the Russell 1000 Value Index RLV +0.68%, in terms of performance. The decline in value relative to growth continues this year, despite the growth surge this year.

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In order for growth to truly make a comeback, there are not enough changes in the macroeconomic environment for this to happen. Julian Emanuel, a strategist at Evercore, wrote that his firm's growth rebound is running into some resistance. 

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There was a 0.3% decline in the Russell 1000 Growth Index, a 0.3% decline in Visa, and a 1.6% decline in Amazon stocks on Thursday, while the S&P 500 dropped by 0.2%.

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It is normal for growth stocks to have fits and starts throughout their development. Apparently, there has been a start to a fit.