History shows this usually this happens after aggressive market selloffs

Investing.com -- Jefferies analysts said in a note Wednesday that the recent sharp decline in growth stocks mirrors past market corrections, but history suggests a rebound may be on the horizon. 

The firm explained that over the past 10 trading days, there has been a “+/-2.5 standard deviation move in growth vs. low-risk styles,” an extreme shift last seen in 2022. 

“When such an extreme move happened last in 2022, we saw an extended period of growth unwinding,” Jefferies writes. 

However, they state that 30 years of data indicate that markets “usually bounce back over the next month,” although momentum stocks tend to underperform.

The current market environment faces multiple headwinds, including the broadening of stock market performance beyond the Magnificent 7 and the rise of AI competitor DeepSeek, which has put a lid on the AI-driven rally. 

“Even before the tariff tantrum, two issues were impacting the large-cap growth trade,” Jefferies says, highlighting that 56% of stocks have outperformed the S&P 500 this year, compared to just 27-28% in 2023-24.

Since 19 February, S&P 500 and Russell 2000 growth stocks have fallen 8% and 10%, respectively. The long-short growth style is also down 7%, similar to the -2.5 standard deviation move seen in March 2022, which preceded a 20% S&P 500 correction over six months.

Despite the current market weakness, Jefferies finds that “longer history shows that markets rebound,” often led by the Russell 2000 and Nasdaq. However, they caution that “momentum stocks falter” in these recoveries, particularly in the post-financial crisis era.

With near-term uncertainty around tariffs and a lack of catalysts from the Fed or earnings season, Jefferies favors “high-yield low-vol laggards” in defensive sectors like healthcare and staples while advising investors to “avoid high-vol expensive growth outperformers.”