Investing.com -- Scotiabank (TSX:BNS) is urging investors to steer clear of expensive U.S. growth stocks, citing heightened uncertainty and a market increasingly favoring quality and value.
"Rising uncertainty is crushing sentiment and hurting high-flyers and speculative stocks," the bank noted in its latest report.
The firm remains neutral on equities overall but advises caution with high-valuation stocks. It recommends focusing on Growth at a Reasonable Price (GARP) rather than names trading at stretched multiples.
Among the so-called Magnificent 7, Nvidia (NASDAQ:NVDA) stock “is actually GARP,” analysts highlight, while Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOGL), Meta Platforms (NASDAQ:META), Tesla (NASDAQ:TSLA), and Netflix (NASDAQ:NFLX) are seen as “expensive growth names.”
Meanwhile, Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL) “currently don’t rank exceptionally well on Growth,” analysts added.
Expensive growth stocks have been underperforming. After a strong recovery from the 2022 bear market lows, this group lagged in 2024. The trend worsened in February, when expensive growth stocks tumbled nearly 9%, while GARP advanced 3.8%.
Sector-wise, Scotiabank notes that U.S. cyclicals are losing momentum despite showing resilient growth metrics. Defensive stocks, meanwhile, are rebounding, with staples and telecoms leading the way.
Energy has shown some recovery in rankings but remains in a long-term downward trend.
“Overall, the cyclicals-over-defensives bias falls down to its lowest since January 2023,” the bank highlights.
Investor sentiment has also deteriorated sharply. The weekly AAII bull/bear sentiment survey hit its lowest levels since the bear market lows of 2022. Short sellers are increasing pressure, and money-losing companies are back to underperforming, with the decline more pronounced in tech than in other sectors.
While the outlook for growth stocks remains uncertain, Scotiabank emphasizes the need to differentiate between sustainable and speculative plays.
"If the worst of the tariff wars end up being avoided, Growth names may retain leadership in 2025. However, the distinction needs to be made between expensive Growth and Growth at a Reasonable Price," the report said.
