“The leadership shift in the equity market looks increasingly pronounced in terms of a shift from growth stocks to value stocks as investors discount more and more rate hikes after last week’s report on U.S. CPI 7.5% year-on-year for January,” Wood said in his weekly note. titled “Greed and Fear”.
The brokerage said the result is a rise in Fed tightening estimates. It could raise rates by 50 basis points at its March meeting.
Wood said money markets are discounting about 150 basis points of US Fed tightening in the current calendar year, while credit spreads have continued to weaken.
Wood’s rating says value stocks have outperformed growth stocks by 16.1% since mid-November.
The U.S. high-yield corporate bond yield spread rose to 3.67% last Friday – the highest level since December 2020, from 2.71% at the end of December. Wood quoted a TV interview as Federal Open Market Committee member James Bulard said the federal funds rate should be 100 basis points higher by July 1.
“It involves a 50 basis point move at one of the upcoming Fed meetings and some sort of balance sheet reduction on top of the withdrawal of maturing securities,” Wood said. He said the tightening was not just about rate hikes, but also about shrinking the balance sheet. Quantitative tightening is in many ways a more brutal instrument and a process more likely to spook markets.
“The growth stock rotation likely won’t be complete until the bull market leaders (i.e. FANG stocks) succumb more decisively,” Wood said.
Earlier this month, Wood pegged the Sensex at the 100,000 level at the end of 2026. He said there were risks of a correction due to external factors, but they should be used as an opportunity to ‘purchase.