"Little Deng" is injured, "Old Deng" rises, is there a rotation signal of "growth-value" in the US stock market?

The U.S. stock market is undergoing a clear style shift. As "Little Deng" — the long-dominant tech stocks — shows signs of fatigue, traditional blue-chip stocks "Old Deng" are stepping up to set new highs.

On Tuesday, market differentiation became the most notable feature. The Dow Jones Industrial Average, representing the traditional economy, surged strongly, recording its 16th closing record high of the year, while the tech-heavy Nasdaq Composite Index fell against the trend. Specifically, the Dow closed up 559.33 points, an increase of nearly 1.2%, at 47,927.96 points; the Nasdaq, on the other hand, fell 58.87 points, a decrease of 0.3%, closing at 23,468.30 points.

Behind this ebb and flow in the market is a subtle change in investor sentiment. The enthusiasm for AI trading has cooled, and funds are beginning to shift towards sectors that represent a broader spectrum of the U.S. economy. Boosted by this rotation, the S&P 500 index rose slightly by 0.2%, closing up 14.18 points, with healthcare, energy, and consumer staples sectors being the main driving forces. The rise in the Dow was primarily led by components such as pharmaceutical giant Merck, biopharmaceutical company Amgen, and sportswear giant Nike.

"Investors are essentially rotating from growth stocks to value stocks," said Sam Stovall, Chief Investment Strategist at CFRA Research, in a phone interview. "This is mainly due to concerns about the valuations of growth stocks and recognition of the appeal of overlooked value stocks." He added that this rotation from "pure growth stocks" to "pure value stocks" has been ongoing since August and is currently accelerating.

Rotation Logic: From Valuation Concerns to Value Discovery

The market's shift in style is not coincidental; its core driving force lies in valuation differences. Sam Stovall analyzed that the divergence in performance between the Dow and the Nasdaq and S&P 500 indices stems from its much lower exposure to tech stocks compared to the latter two. He observed that within the S&P 500 index, investors are undergoing a clear style switch.

Stovall defined the 100 stocks at the two extremes of the S&P 500 index's growth stocks (XX:SP500PG) and value stocks (XX:SP500PV) as "pure growth stocks" and "pure value stocks." He noted that the rotation trend is very evident from the performance of these stocks. This indicates that investors still wish to remain in the stock market but are looking for new targets, akin to "jumping from one lily pad to another."

He explained that the market was previously driven mainly by sectors such as communication services, discretionary consumer goods, industrials, and technology, and these sectors have shown "very steep premiums" relative to their long-term averages.

Macroeconomic Background: Weak Data Strengthens Rate Cut Expectations

Weak macroeconomic data has not only failed to suppress the market but has also provided more room for imagination regarding the Federal Reserve's easing path, creating a favorable macro environment for the rotation into value stocks According to a report from payroll processing company ADP Inc., the U.S. private sector averaged a reduction of 11,250 jobs per week in the four weeks ending October 25.

Ross Mayfield, an investment strategist at Baird Private Wealth Management, believes that despite the weak performance of private labor market data, this is somewhat “what the market needs to happen,” as it allows the Federal Reserve to continue on a path of easing. He stated:

“As long as the data does not point to a recession, the market will not be unsettled by weak labor market data, as it will serve as a catalyst for larger rate cuts by the Federal Reserve.”

Short-term Disturbance: Government "Shutdown" Controversy Eases

With the elimination of a short-term political risk, the market's focus has returned to economic fundamentals and monetary policy expectations.

Another variable facing the market this week is the issue of a U.S. government shutdown. Reports indicate that the U.S. Senate approved a funding bill on Monday evening, which is expected to end the longest government shutdown in U.S. history within a few days. The bill has now been sent to the House of Representatives for a final vote.

In this regard, Ross Mayfield pointed out that for most of October, “the market has priced in the expectation that the government shutdown will end and will not leave lasting economic impacts.” As this short-term uncertainty gradually dissipates, investors will pay more attention to core issues such as corporate valuations, profitability, and the direction of Federal Reserve policy, which is precisely the key to the current rotation between “growth and value” styles.