Growth Stocks on Record Outperforming Value Stocks, But Change is Imminent
In a stunning development, growth stocks have outperformed value stocks by the widest margin on record. For more than 30 years, value stocks have not been this cheap relative to growth stocks. This divergence, however, may soon be coming to an end.
According to analysts at Jefferies, growth stocks have consistently outperformed value stocks by a ratio of two-to-one since January 1991. This is the widest margin of outperformance in at least 33 years. However, there are signs indicating that this trend is overdue for a reversal.
Andrew Greenebaum, Senior VP of U.S. Product Management at Jefferies, points to the share of earnings revisions as a promising indicator. Recently, the difference between earnings revisions for companies in the Russell 1000 Growth Index and companies in the Russell 1000 Value Index has shifted in favor of value stocks. This suggests that Wall Street’s expectations for growth stocks’ earnings may have reached their peak.
If this trend holds, value stocks could be on the verge of another period of outperformance. “We’re getting to a point where there were fewer upward revisions in favor of growth, and in value, there are more relative upward revisions than there were before,” says Greenebaum. He adds, “The trajectory of estimate revisions tends to be one of the most important factors determining the trajectory of stocks. Better revisions typically mean better price action.”
Although growth stocks have consistently outperformed value stocks since before the financial crisis, there have been exceptions during periods of global economic recovery. The most recent instance was during the 2022 market rout, when value stocks rallied while growth stocks fell. However, growth stocks bounced back strongly in 2023, fueled by the rally in shares of megacap technology stocks.
While growth stocks have continued to outperform value stocks this year, there are signs that the pendulum could be swinging back towards value. As shares of U.S. megacap technology stocks retreated, the value-stock ETF saw an increase in value while the growth-stock ETF declined. Additionally, small-cap stocks have been outperforming the S&P 500 index, indicating a broader shift in market leadership.
The market is closely watching for any further signs of a reversal in the growth vs. value dynamic. If value stocks continue to gain momentum, it could mark a significant shift in the investing landscape.
Analyst comment
Neutral news.
As an analyst, there are indications that the trend of growth stocks outperforming value stocks may be coming to an end. The share of earnings revisions has shifted in favor of value stocks, suggesting that growth stocks’ earnings expectations may have peaked. If this trend continues, value stocks could potentially see another period of outperformance. The market is closely watching for signs of a reversal, as it could indicate a significant shift in the investing landscape.