Back to Neutral on Style Amid Stock Market and Economic Data Volatility

After two months favoring growth, Northlake’s Style model shifted back to neutral for March. There is no change to the large cap signal from the Market Cap model that went into effect at the beginning of January. As a result of the new Style model signal, clients using Northlake’s model strategy will see half of the current investment in the Russell 1000 Growth (IWF) shift to the Russell 1000 Value (IWD).

The combination of a weak month for growth stocks, especially the Magnificent 7, and signs of slowing in recently released economic data are the factors behind the shift. A shift from growth to neutral on growth vs value seems counterintuitive when economic data shows weakness. However, many value sectors benefit from the decline in interest rates that has occurred against the series of weaker than expected economic data. There has also been a further pullback in AI stocks since Microsoft announced a cutback in its spending on AI infrastructure. This exacerbated the fears that were first raised when Chinese company DeepSeek announced a more efficient, lower cost AI model in January. Investors have rotated toward left behind sectors such that included many value stocks in order to have better balance in their portfolios.

Northlake is comfortable with the shift back to neutral in the Style model. It fits well with our view that market breadth will be better in 2025. We also like making fewer bets for or against market trends when economic and political policies are undergoing dramatic change with uncertain outcomes. Upending decades of established policy makes it difficult to forecast which leaves us comfortable with the lower risk of large cap stocks and a diversified approach to growth vs. value.

So far this year, the models are off to a mixed start. The Market Cap model is running a little head of the S&P 500 benchmark after a good call beginning the year favoring mid cap and then shifting to large cap at the start of February. The Style mode shift to growth to begin 2025 proved ill-advised as the pullback in the Magnificent 7 caused the Russell 1000 Growth (IWF) to fall slightly while the S&P 500 is up a little so far this year.

SPY, IWD, and IWF are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov.