Investors see value stocks like banks leading the way in the second half, CNBC survey finds

Traders on the floor of the New York Stock Exchange.

Source: NYSE

Wall Street investors believe cheap and economically sensitive stocks will regain leadership in the second half of 2021, according to a new CNBC poll.

As part of CNBC’s quarterly report, we surveyed approximately 100 chief investment officers, equity strategists, portfolio managers and CNBC money-managing employees about their position in the markets for the remainder of 2021. The survey was conducted from June 23 to June 30.

Nearly 70% of respondents said value stocks will outperform their growth counterparts in the next quarter.

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After an impressive rebound from pandemic lows, the rally in value stocks paused as restrictive Federal Reserve policies and inflationary pressures led investors to reassess the outlook for economic growth. The Russell 1000 Value Index fell 1.3% in June, trailing its growth counterpart by more than 7 percentage points as technology stocks outperformed bond yields stabilizing.

Investors could bet on a rotation back in value as they expect the case for economic recovery to stay intact and lead to rising yields again in the months ahead. Almost half of the respondents said the US 10-year Treasury yield will exceed 2% by the end of the year. The key rate was last traded at 1.46% after hitting a high of 1.75% in March.

At the sector level, the majority of investors (67%) believe financial stocks will be a profit for the remainder of 2021. The S&P 500 financial sector is the second best performer this year, up 24.5% year-to-date.

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Big banks are increasing their dividends after the Federal Reserve’s stress test that all 23 banks passed. The central bank said that in a hypothetical economic downturn, the industry would be “well above” the level of capital required.

Morgan Stanley said it would double its quarterly dividend. JPMorgan Chase increased its dividend 11% to $ 1 per share. Bank of America said its dividend would rise 17% to 21 cents. Goldman Sachs announced it would increase its dividend 60% to $ 2 per share.

Inflation is the greatest risk

When asked what is the greatest risk to the market, more than 40% of respondents said inflation, while 27% said a resurgence of the new Covid cases, 21% said the Fed was adopting a tightening, and 9% believed it it is rampant retail speculation.

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Inflation remains the hottest topic of discussion on Wall Street as its staying power could push or break a stock market to record highs in mid-2021. The Fed shrugs off the latest hot inflation readings and holds the view that any price pressures during the historic economic recovery will be ephemeral.

The measure preferred by the central bank – the core price index for consumer spending – rose 3.4% yoy in May, the fastest increase since the early 1990s.

Mohamed El-Erian, Allianz’s chief economic advisor, recently warned that the Fed is underestimating inflation and risking the US falling into another recession.

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To hedge against inflation, more than half of the respondents said their favorite trade is oil. Commodity prices tend to move in step with inflation.

US crude West Texas Intermediate broke above $ 75 on Thursday, hitting its highest level since October 2018. The WTI rose more than 50% in 2021 as demand rebounded from the pandemic. The S&P 500 energy sector was the biggest winner this year, up 43%.

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