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The Call @ Hedgeye | March 28, 2024

Hedge Fund Freak-Out: What's Up With All The Calls To "Sell, Sell, Sell!" - sell button

"Hedge Funds Gird for Stock Selloff as Valuations Rattle Nerves," reads a Bloomberg headline this morning. In 2017, U.S. stocks have already added $1.5 trillion in market value. Sky-high valuations and slow-to-materialize economic data has led to investor skittishness, the article continues. So "Hedge funds are bracing for tough times ahead."

But why?

Valuation is not a catalyst

#Stocks #ElectionDay $SPY

Sure, at 22 times trailing twelve month earnings, stocks aren't cheap. But as we've noted before, one month after Election Day market pundits cried, "stocks are expensive." In the ensuing months, stocks got more expensive. The S&P 500 is up +6% since mid-December.

This has been a trend for some time now. Take a look at equity market "style factor" performance over the past six months in the Chart of the Day below. Here are the key callouts:

  • High Beta Stocks – the companies most tethered to the moves of the broader market – are up +16.1% in the past six months. Conversely, low beta stocks are up just +2.0%. 
  • Large Cap Stocks are up +11.6% versus +0.6% for small cap stocks in the past six months. 
  • Top 25% Earnings Per Share Growers are up +9.7% versus +2.1% for the bottom 25% of EPS growers in the past six months.

"In other words, if you’ve been long Big Cap Growth with a High Beta tilt, you have flat out crushed it on both an absolute and relative return basis," Hedgeye CEO Keith McCullough writes in today's Early Look.

The reason why the stock market continues to head higher has nothing to do with valuation and everything to do with the acceleration in the U.S. economy, inflation and earnings.

Hedge Fund Freak-Out: What's Up With All The Calls To "Sell, Sell, Sell!" - 03.07.17 EL Chart

What Now?

We've got a lot of ideas. Here's a tiny taste. Consider buying the Russell Growth (IWO) index. Now, the Russell growth index is up 15% since Election Day. But as we'd remind you, expensive can get a heck of a lot more expensive as U.S. growth accelerates.