Source: Wall Street See

Value stocks in the United States have recently been no more attractive to investors than garbage stocks, but market analysis shows that they may be bottoming out.

Track$S&P 500 Index (.SPX.US)$Vanguard S&P 500 value ETF (VOOV), which tracks stocks with lower P/E ratios, has only risen 5% this year, compared to the overall 15% increase of the S&P 500 index, showing a significantly poor performance. Although these value stocks are generally considered fairly priced or undervalued, their performance in the stock market has not even reached the level of the large-cap.

In fact, this value fund has had several brief rebounds, but it always encounters a sell-off whenever the price reaches $180. As of the time of writing, the price on Tuesday afternoon was $175.68.

Analysts believe that this key value stock indicator has fallen near the 200-day moving average, which is a clear rebound signal in history; the Fed is likely to initiate a rate cut cycle later this year, and expectations for the accelerated recovery of the U.S. economy also favor the rebound of value stocks.

Dennis DeBusschere, an analyst at 22V Research, listed the value stocks that are expected to rebound in the latest report, including $General Motors (GM.US)$, $United Airlines (UAL.US)$, $American Airlines (AAL.US)$, $Ford Motor (F.US)$, $Invesco (IVZ.US)$ and $MetLife (MET.US)$.

Has fallen near the 200-day moving average, indicating a rebound signal?

Currently, VOOV's stock price is unusually low, only slightly higher than its 200-day moving average of $166, which is usually seen as a positive signal by the market.

According to FactSet, unless major adverse events such as epidemics or a series of rapid rate hikes starting in early 2022 occur, investors usually buy when the stock price touches the 200-day moving average over the past 20 years or more.

This pattern indicates that if the market does not have any unexpected severe negative impact, VOOV is expected to find support near the current level.

In addition, VOOV is currently trading at a P/E ratio of around 15.8 times, which is about 26% lower than the S&P 500 index's 21.1 times. Over the past 10 years, according to media calculations using FactSet data, the discount of this value stock fund relative to broader indexes has averaged about 17%.

With Fed rate cuts imminent, will value stocks rebound?

It is worth noting that value stocks often belong to mature companies, and their profits are more influenced by changes in consumer and corporate demand than driven by industry-specific factors, such as banking. Therefore, the performance of value stocks is usually closely related to economic cycles, and these stocks may bear greater downside pressure in times of slowing economic growth and high interest rates.

However, the current economy is facing a situation of slowing growth. It is widely expected that the Fed may cut interest rates to stimulate economic growth as inflation pressures ease. However, this expectation is not set in stone, and the specific timing and amount of rate cuts are still full of variables.

This uncertainty has brought continuous worries: if economic growth continues to slow and interest rates remain at high levels, this will pose a double blow to value stocks.

Changes in economic expectations, as reflected by the bond market, may lead to dramatic fluctuations in value stocks.

According to data from the St. Louis Fed, the yield of 2-year U.S. bonds is currently about 0.3 percentage points higher than 10-year bonds, marking the largest yield curve inversion so far this year. This abnormal phenomenon reflects investors' concerns that the Fed may maintain high short-term interest rates for a long time to combat inflation, which may suppress consumer and corporate demand for goods and services.

At the same time, long-term bond yields are lower than short-term bonds, indicating the market's concern that the Fed's current policy may lead to sustained economic weakness, thereby reducing long-term inflation expectations.

Analysts believe that once the Fed sends out the first signal of interest rate cuts, the yield of 2-year U.S. bonds should fall, the market will be more confident in long-term economic growth, which will push up the yield of 10-year U.S. bonds. The improvement of the yield curve inversion is usually beneficial to the economy.

Powell said earlier that the Fed has made considerable progress on inflation, but hopes to see more progress before having enough confidence to start cutting interest rates. Powell refused to give any specific information on the first interest rate cut by the Fed. Currently, the market is more inclined to make the first interest rate cut in September within this year.

In his report, analyst Dennis DeBusschere from 22V Research wrote:

The yield curve should steepen to support the rebound of value stocks.

Editor / jayden