"The change in equity market leadership looks ever more pronounced in terms of the shift from growth to value stocks as investors have discounted ever more rate hikes following last week's higher US inflation," Wood said in the Jefferies Greed & Fear report.
The report says since mid-November, value stocks have outperformed growth stocks by 16.1%.
Money markets are discounting 150 basis points of Fed tightening in 2022 while credit spreads have continued to widen, a process that surely can continue only so long as the Fed is perceived to be behind the curve, the report said.
The US high yield corporate bond yield spread rose to 3.67% last Friday -- highest level since December 2020 -- and is now 3.54% from 2.7% last December.
"Overall the current situation can best be summarised as the inverse of Goldilocks. It also continues to look ever more the case that the FANG stocks peaked as a percentage of S&P500 market cap back in the summer of 2020. In this respect, the rotation out of growth stocks will probably not be completed until the leaders of the bull markets succumb in a more decisive fashion," the Jefferies report said.
The brokerage firm said that the result is rising Fed tightening estimates and even conjecture that it may raise rates by 50 basis points at its March meeting.
Last Thursday, Fed official James Bullard said that the federal funds rate should be 100 basis points higher by 1 July. This implies a 50 basis point move at one of the upcoming Fed meetings and for some sort of balance sheet reduction over and above the run-off from maturing securities, the report said.
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