Despite strong share price gains so far in 2023, Vanguard S&P 500 Growth Index Fund ETF Shares have more upside potential due to improving broader market fundamentals. Falling inflation and rising chances of a rate cut in the second half are likely to boost investor confidence in high-beta ETFs like VOOG. Growth stocks have already reached a bottom in 2022, and 2023 is expected to be a recovery year with significant upside potential for high-beta stocks in the second half.
VOOG: Growth Stocks Seem Poised To Maintain Their Uptrend (NYSEARCA:VOOG)
The double-digit gains in Vanguard S&P 500 Growth Index Fund ETF Shares (NYSEARCA:VOOG) do not appear to be a bear market rally because stocks have already factored in and passed through a period of unfavorable events. Furthermore, it appears that growth stocks are likely to maintain their uptrend in light of the Fed's pivot, higher-than-expected earnings, and reasonable valuations. Therefore, investors who bought VOOG on the dip should hold their positions, while those who missed out on the opportunity may still have time to buy.
It's Not a Bear Market Rally
In my previous article, ‘VOOG: Now Is The Time To Buy For Huge Long-Term Gains,' published in late December, I advised investors to buy growth stocks because the ETF had already bottomed out and the stage was set for a strong recovery. Shares of VOOG have increased by about 12% so far in 2023, proving my prediction to be accurate.
In my opinion, the recent increase was not a bear market rally with expectations of further gains mainly due to the Fed's pivot. Given the stress in the financial sector, which many believe at least has a similar impact on the economy as the quarter-point rate hike, it is highly possible that Fed will leave interest rates unchanged in June in the range of 5% to 5.25%. Therefore, we can consider that interest rates have already peaked in May.
According to CME data, traders anticipate a 90% chance of rate cuts in the second half of the year. Aside from financial sector stress, falling inflation supports the likelihood that rate hikes will be suspended in June and a cut will be implemented in the second half of the year. Inflation, which is currently near the lowest in nearly two years, will continue to fall in the coming months due to low energy prices. Although the Fed's policy has slowed job growth in recent quarters, the labor market remains very strong, with the unemployment rate currently at a 53-year low of 3.4%. It appears that the market is likely to witness the best scenario for growth stocks, which is returning to a low level of inflation without a major change in the employment rate and entering a severe recession.
Tech, Consumer Cyclical, and Healthcare Supporting Growth ETFs
In my previous article, I discussed how VOOG's exposure to technology stocks makes it one of the best bets for capitalizing on the uptrend. So far in 2023, technology stocks have been among the top gainers in the S&P 500. Aside from the Fed's pivot, better-than-expected earnings have increased investor confidence and the upside potential. According to FactSet data, 87% of technology companies exceeded revenue and earnings expectations in the first quarter. Apple (AAPL), for example, not only exceeded expectations but also announced a massive $90 billion share buyback program. Similarly, Microsoft (MSFT) exceeded expectations in the March quarter, and approximately 92% of Wall Street analysts raised their forecasts for the full fiscal year. Microsoft made $2.45 per share in the March quarter compared to $2.22 per share in the same quarter a year earlier.
In the first quarter, revenue growth in the healthcare sector increased by 4% year on year, far outpacing the 0.9% year-on-year growth in the same period last year. For example, UnitedHealth Group (UNH), one of VOOG's top ten stock holdings, reported revenue of around $92 billion versus expectations of $89.7 billion. Additionally, with a growth rate of 53.6%, the consumer discretionary sector has the highest earnings growth rate among S&P 500 sectors. The sector's largest contributor to earnings growth is Amazon (AMZN). Its revenue increased 11% from the same period last year, and Q1 GAAP EPS of $0.31 beat estimates by $0.11. Overall, Q1 earnings have surpassed expectations, and FactSet data shows that earnings of the S&P index for the year are likely to increase compared to initial expectations for a high single-digit to a double-digit percentage decline.
Quant Ratings
Quantitative analysis is among the most useful techniques for examining an investment. In the case of VOOG, the ETF received a buy rating with a quant score of more than 4. The ETF scored highly on momentum because it has outperformed the broad market index so far in 2023 by about 15% and the average of all ETFs by 54% over the previous three years. Momentum is a technical indicator that predicts how well stocks or ETFs will perform in the future. Another important factor is a higher quant score on the liquidity factor. A high liquidity level shows that the ETF has been attracting more inflows, which is a sign that investors are becoming more confident in its future performance. Its expense ratio of 0.10%, which is almost 46% lower than the median of all ETFs, also received an A quant grade.
Valuations
Although growth category valuations have risen slightly in recent months, their forward price-to-earnings ratio of 19.9 remains significantly lower than both the two-year and five-year averages. Value stocks, on the other hand, trade at lower forward earnings than growth stocks, but they currently trade around five-year averages and are significantly higher than the ten-year average. Furthermore, following the earnings surprise in Q1, earnings for growth stocks could outperform expectations for the rest of the year due to slowing inflation and the Fed's pivot. This would provide more room for share price growth without significantly altering valuations.
In Conclusion
The recovery in growth stocks, which began early this year, appears to be sustainable because broader market fundamentals for assets closely correlated to inflation, Fed policies, and economic trends have begun to improve. A high proportion of earnings surprises in growth-oriented industries highlight the strengthening of market trends. Overall, growth stocks are still in the buying range based on fundamental factors, valuations, and quant ratings.