A trader works on the floor of the New York Stock Exchange during the afternoon of December 4, 2015 in New York City.
Andrew Burton/Getty Images
CS sees GDP growing 8% this year and says the 10-year yield might reach 2% in the next 12 months.
US growth stocks outperformed value 57% of the time over the last 30 years when yields rose.
This time, 14 high-quality growth stocks could outperform the market.
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Stocks fell from all-time highs on Friday as the market digested better-than-expected earnings results from key companies, Biden's spending plans, and US economic data that indicates potential inflationary pressures to the economy. On Tuesday, the Conference Board announced consumer confidence jumped to a 14-month high of 121.7 in April, from 109 in March. And on Thursday, the Commerce Department said US GDP grew around 1.6% in the first quarter of 2021, or 6.4% on an annualized basis. Although growth during this period marked the second-fastest pace for any quarter in the US since 2003, GDP could grow even faster, with the pace likely reaching 8% this year, according to Andrew Garthwaite, a global strategist at Credit Suisse. Since consumers have around $1.9 trillion in excess savings and are changing their spending behaviors on the back of increased confidence in their wealth, US GDP could grow by 1% to 2%. Additionally, Biden's first fiscal package is likely to boost GDP by 6%, while the second and third packages could raise GDP by 1% to 2% per year, he said. And even though Biden's second and third packages still have to pass the House before being signed into law, there are growing concerns about the inflationary pressures that might arise from Biden's massive spending plans and the Fed's ongoing dovish stance. "We think US 10-year yields will rise to 2% with the bond yield rising to 20bps in the next 12 months; critically we expect this to be led by inflation expectations rather than real yields," he wrote, adding that the TIPS yield (which represents the real yield that factors in the rate of inflation) likely won't see a major rise.A bond's future cash flow is threatened by inflation, as it erodes the value of cash. And if market participants believe higher inflation is coming, interest rates and bond yields typically rise to make up for the loss of future purchasing power. And against a backdrop of rising yields, US growth stocks have been able to outperform their value peers 57% of the time over the last 30 years. Furthermore, this year's environment could be a favorable one for some names within growth, even as the area isn't expected to outperform, he said. "For growth to outperform, we would need to see a fall in the TIPS yield and we do not see that happening given our positive view on GDP growth and productivity," he said. Additionally, growth valuation has entered the "danger zone" of previous bubbles, inflation expectations are growing, and analysts are positively altering initial earnings expectations for value, according to Garthwaite.Yet, big areas within value such as autos, fossil fuels, and tobacco are facing disruptions from renewable energy and could be viewed as ESG-toxic to some, he added. Consequently, some high-quality growth stocks could outperform the market. To identify such names, Garthwaite and his team looked for high-quality names where most of their finances are in the form of equity rather than debt, that are generating enough cash to pay obligations, in the top 25% of operational quality, and look cheap to their HOLT tool that compares company valuations. The stocks are listed below in alphabetical order. We have included their corresponding tickers, Net Debt/EBITDA (a measurement of leverage), and 12-month forward price-to-earnings ratio.
Ticker: GOOGLNet Debt/EBITDA: 0.3812-month forward PE: 31.2Source: Credit Suisse
2. Applied Materials
Ticker: AMATNet Debt/EBITDA: 0.1712-month forward PE: 20.6Source: Credit Suisse
Ticker: BXNet Debt/EBITDA: 0.3012-month forward PE: 23Source: Credit Suisse
Ticker: DHRNet Debt/EBITDA: 0.2612-month forward PE: 30.7Source: Credit Suisse
Ticker: EBAYNet Debt/EBITDA: 0.3512-month forward PE: 15.1Source: Credit Suisse
Ticker: FBNet Debt/EBITDA: 0.2012-month forward PE: 25.1Source: Credit Suisse
Ticker: HSYNet Debt/EBITDA: 0.2012-month forward PE: 23.4Source: Credit Suisse
8. Home Depot
Ticker: HDNet Debt/EBITDA: 0.3712-month forward PE: 25.1Source: Credit Suisse
Ticker: KEYSNet Debt/EBITDA: 0.1612-month forward PE: 24.1Source: Credit Suisse
Ticker: KLACNet Debt/EBITDA: 0.2712-month forward PE: 22.5Source: Credit Suisse
Ticker: MSFTNet Debt/EBITDA: 0.3212-month forward PE: 32.5Source: Credit Suisse
Ticker: MCONet Debt/EBITDA: 0.1912-month forward PE: 28.9Source: Credit Suisse
13. Texas Instruments
Ticker: TXNNet Debt/EBITDA: 0.5312-month forward PE: 27.1Source: Credit Suisse
14. Thermo Fisher Scientific
Ticker: TMONet Debt/EBITDA: 0.1612-month forward PE: 22.8Source: Credit Suisse
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