US growth stocks have experienced a remarkable rally in 2023, bouncing back from a lacklustre performance in 2022. In light of this, Janus Henderson analyses the probable drivers behind this surge, current market conditions, and future prospects of the asset class.

“We can identify several reasons for the surge this year. Firstly, markets have embraced the artificial intelligence (AI) theme that could be very important for the future earnings of technology companies in particular,” writes Oliver Blackbourn, Portfolio Manager at Janus Henderson Investors. 

According to him, other reasons include liquidity injection into the financial system and a sentiment and positioning squeeze, with investors trying to re-engage with the market after a dismal 2022. 

Furthermore, the asset manager highlights the surge in bullish sentiment among US individual investors and advisers in 2023, resulting in increased exposure to NASDAQ 100 and S&P 500 futures contracts. Janus Henderson also notes that the significant decline in the VIX index has favoured US growth companies.

Subsequently, Blackbourn discusses the challenges ahead for US growth stocks. He points out that although earnings expectations for the NASDAQ 100 Index have rebounded from the decline between April 2022 and February 2023, concerns persist regarding the potential impact of interest rate increases on economic growth.

“More leading indicators of growth suggest that we may yet see a slowdown in economies…While growth stocks performed well through the pandemic recession of 2020, there is still a significant degree of cyclicality in their earnings historically,” said the asset manager. 

Along with this, Blackbourn mentions that regulatory intervention poses a potential threat to US growth stocks, especially amid the 2024 US election campaign.

“While not yet clearly stretched, sentiment has reset dramatically since late 2022, but there is only so much optimism that markets can hold before fragility starts to set in. This suggests that the rally may become more fragile from here without further catalysts for an even rosier outlook,” the asset manager concluded.

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