The US market has seen a heroic recovery since the March 2020 lows. Growth has been the clear winner in the US over the last year, except for the first quarter of 2021, when value funds outperformed. Now growth is having a stellar time again with June being the biggest month for outperformance verses value in the past 20 years. This outperformance was buoyed by more hawkish comments from the US Federal Reserve lowering the probability of a potential inflation problem, at least in the shorter term.

Although US equities are now at an all-time high on several metrics, having just completed our six-monthly review of the US equity sector, we continue to see opportunities for investors. The yo-yoing in performance between growth and value in the US equity sector has made it an interesting space for the active manager. Against this backdrop, we believe it is important to maintain a balance of growth and value in a portfolio, particularly given the expected uncertainty in the near-term.

Since the US market has gone higher, outperformance has switched back to the growth winners we saw last year, rather than the value names in the previous quarter. While the largest five stocks in the S&P powered over 50% of the market’s increase in 2020, these stocks were not the only game in town. Many other growth names produced better returns last year.

Along with non-profitable tech there was also strong returns from non-profitable initial public offerings (IPOs) in 2020. For example, 80% of companies that went public in 2020 were unprofitable in the 12 months prior to their IPO. Despite this, the 2020 return from IPO stocks was over 100%, with first-day rallies almost three times bigger than the average of the last 40 years. Last year was one of the best years for growth investing ever and the “growthier” the business, the better. This demand for growth goes hand in hand with the return for retail client. There is no question that retail investors are back, with over 10 million new retail brokerage accounts opened in the US in 2020. This could continue as recent surveys show that large numbers of US citizens plan to use stimulus checks to buy stocks.

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Surge in SPAC IPOs

In the first quarter of this year, we saw 12 special purpose acquisition companies (SPACs) IPO in the US, raising $3.6bn. These SPACs are sometimes called blank check companies and are shell corporations with the sole purpose of buying something at some point. SPAC companies are not new but all the US managers we spoke to as part of our six-month review expressed some form of concern about the huge number of them currently raising retail capital. Interestingly this concern was expressed by growth and value managers alike, although admittedly they did highlight that SPACs are healthy for the market longer term, as many of them are looking to take private companies public.

Strong economic recovery in the US

Given its significance and the recent headlines it would be remiss of us not to acknowledge the potential impact that inflation could have on the US equity market. The Consumer Price Index (CPI) in June rose at 5.4% year on year, well ahead of the 4.9% expected. This was the strongest pace of growth since 2008, driven by factors such as energy, which was up 24.5% year on year.

Recently we have seen the bond market beginning to price in higher inflation on the back of the economic recovery. It’s important to understand that inflation is not only kryptonite to bonds, it also impacts equities. The prospect of higher yields can affect stocks, especially the growth stocks which have enjoyed significant momentum from plunging rates of the past few years. Given the dominance of growth names in the US market, this could provide a headwind for growth stocks and the broader index but should be a good opportunity for an active manager. With value winning the first quarter and growth winning the second quarter in 2021, there’s still much to play for in the final half of the year.

Scott Spencer is investment manager in the multi-manager team at BMO Global Asset Management