The value stock comeback could be a bad sign for the market

After broad underperformance for most of this year, value stocks are beginning to outpace growth stocks. To some, that's a bad sign for the overall market.

Growth began markedly outperforming value, as measured by the iShares Russell 1000 Value exchange-traded fund versus the iShares Russell 1000 Growth exchange-traded fund, last December as investors began pricing in prospects of growth kicking into high gear under the Trump administration.

But this trend saw a bit of a reversal last month, said Gina Sanchez, CEO at Chantico Global. This is likely the beginning of a more sustained shift in market leadership toward value stocks as growth stocks' valuation comes into question, she said.

"The switch in market leadership from growth stocks back to value stocks is an important turning point, and something of a canary in the coal mine. This shift tells us that investors are getting concerned about the price they are paying for the stocks they buy," Sanchez wrote Monday in an email to CNBC.

Generally, growth stocks like information technology names and consumer discretionary flourish in times of economic expansion, Sanchez contends. Since the presidential administration has been unable to pass anticipated legislation around tax reform, "we suspect that multiples have priced in more growth than is sustainable, which will lead investors back towards value investing," Sanchez said.

In a note Monday morning, Bank of America Merrill Lynch chief investment strategist Michael Hartnett extrapolated on a broader reason behind the outperformance of growth over value under a section in his report called "The End of QE Trade," referring to monetary policy known as "quantitative easing."

"Since Bear Stearns event, expanding Fed balance sheet has led the outperformance of High Yield versus Treasuries, of Growth versus Value," and of US equities versus equities abroad.

In other words, historically low interest rates in the U.S. implemented in the wake of the financial crisis have proved a boon to growth stocks. As the Federal Reserve moves to unwind its massive balance sheet and "normalize" monetary policy by hiking rates, growth stocks may not flourish as easily as they have in years past.

Over the past month, value stocks as measured by the iShares Russell 1000 Value exchange-traded fund are up 2.66 percent, while growth stocks as measured by the iShares Russell 1000 Growth fund have risen a little over 1 percent.


Trades to Watch

Trader Bios


Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more