Vanguard Growth ETF: More Upside Ahead (NYSEARCA:VUG)

Vanguard Growth ETF’s (NYSEARCA:VUG) stock price will likely recoup last year’s losses as macroeconomic factors improve and corporate results exceed expectations. The recent uptrend also does not appear to be a bear market rally, as adverse events have already been factored in and market fundamentals for growth companies, particularly in the information technology, consumer discretionary, and communication services sectors, have begun to improve. As I expect growth stocks to continue their uptrend with a few shortfalls, there is still time for long-term investors to take advantage of the potential gains.

Growth Stocks 2023 Outlook is Improving

The price collapse during a bear market is painful, but it also creates significant profit-making opportunities for investors who buy undervalued stocks around the bottom of the selloff. In November, when stocks were near their lows, I suggested investors buy growth stocks and ETFs like VUG to capitalize on potential gains in 2023. My prediction proved right, as VUG’s price has increased by more than 13% year to date. Investors who missed out on an appealing buying opportunity can still jump into growth stocks because there is still significant upside ahead. History also tells us that after every bear market, stock markets always produce a strong bull run that lasts for many years. Moreover, I believe the latest uptrend isn’t a bear market rally. Stocks are currently in a recovery phase and are soon likely to enter bull market territory (a surge of 20% from the bottom of the bear market). Factors such as falling inflation, the Fed’s pivot, and improving economic trends are bolstering the upside momentum. Inflation fell for the sixth consecutive month in December to 6.5%, a significant drop from the four-decade high of 9.1% in June. According to market consensus, inflation will likely fall to around 3% by the end of the year.

Meanwhile, the risk of a hard landing and recession has been decreasing due to continued labor market strength and signs of improvement in business activity. In January, the US job market added 517,000 jobs, while the unemployment rate fell to a 53-year low of 3.4%, indicating that there is no imminent threat of an economic slump in the short term. In an earnings call, companies such as Ford (F), McDonald’s (MCD), United Parcel Service, Inc.(UPS), and U.S. Bancorp (USB) have informed investors that they are bracing for a mild US recession, while American Express Company (AXP) and General Motors (GM) believe the country will avoid a severe slump. After the latest job and inflation figures, Goldman Sachs has reduced the odds of a recession to 25% from 35% previously and expressed greater confidence in a soft landing and low downside equity risk in the near term.

Earnings Risk is Mitigating

Growth equities are probably going to gain from the optimistic view that macroeconomic worries have already had an impact on growth businesses and that things will get better in the coming quarters. Furthermore, with 69% of S&P 500 companies reporting a positive EPS surprise for the fourth quarter, concerns that quarterly earnings will reverse the upward trend in growth stocks have also diminished. In particular, the information technology sector, which makes up roughly 40% of VUG’s portfolio, ranked as the second-best performer among the 11 S&P 500 sectors in terms of earnings beat in the fourth quarter. Despite Apple’s (AAPL) fourth-quarter earnings miss, 77% of technology companies topped analysts’ expectations. As Apple shares rose after fourth-quarter earnings and are up over 20% year to date, investors appear to be ignoring short-term headwinds. Morgan Stanley believes that these difficulties are only temporary, citing the growing installed base of iPhones and the prospects for margin growth.

A large number of consumer discretionary companies have also outperformed earnings forecasts, and their shares have benefited from improving investor confidence. Vanguard Consumer Discretionary ETF, which includes Amazon.com Inc. (AMZN), Tesla Inc. (TSLA), Home Depot (HD), McDonald’s, and Nike (NKE), has gained nearly 15% year to date. In total, 67% of the consumer discretionary stocks reported earnings that exceeded analyst consensus estimates. Growth stocks from the healthcare sector have also outperformed earnings estimates. Healthcare companies are thought to be recession-proof because their products and services are always in demand.

Valuations Look Attractive

Despite the recent rally, growth stocks remain in the buy zone. A price plunge in 2022 has helped bring their valuations back in line with their 5-year averages. Furthermore, valuations appear reasonable because the forward P/E of growth stocks fell due to a drop in stock prices rather than a drop in earnings. Earnings in fiscal 2023 are expected to increase by more than 2% over the previous year, according to FactSet. What’s more, growth stocks currently appear more appealing than value stocks. This is because the recent surge in stock prices has pushed the forward P/E of value stocks to around its peak level of 2021, implying that there is only limited upside left ahead. The forward P/E of growth stocks, on the other hand, is significantly lower than its previous peak.

Quant Ratings

Vanguard Growth ETF gained a buy rating based on quant ratings. Solid share price gains over the last month helped it earn a B-plus on momentum. A high momentum factor score suggests that the ETF’s price has a good chance of continuing its upward trend. The ETF also earned top grades on expenses and liquidity factors. Its low expense ratio of 0.04% means that investors will pay less in fees. Whereas, an A-plus grade on liquidity indicates a high trading volume, which increases the likelihood that a price increase will be long-lasting. On the negative side, the ETF received a low dividend grade, which I believe is unimportant when it comes to growth investing.

In Conclusion

Many analysts predicted that stock markets would remain under pressure in the first half of 2023, but attitudes appear to be shifting in the opposite direction as corporate earnings exceed expectations and the likelihood of a recession decreases. So far in 2023, the tech-heavy Nasdaq index and Vanguard Growth ETF have recovered nearly half of their 2022 losses. Long-term investors can still jump into growth stocks as macroeconomic conditions encourage the emergence of a bullish trend in the following quarters.