A scene at the New York Stock Exchange this week.
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Value stocks have gotten a shot in the arm from the economic recovery, but their strong performance may be more than a short-term trading opportunity. They are looking more like a solid longer-term bet.
Value stocks are more sensitive to the strength of demand in the economy than growth shares, so they surged as the economy rapidly bounced back in response to Washington’s trillions of dollar in fiscal and monetary stimulus and the lifting of stay-at-home orders. Gains in growth stocks, which fell less as the economy stalled out in the spring of 2020, have been smaller.
The Russell 1000 Value Index has risen 37% since the end of September 2020, when financial market prices began reflecting the economy’s comeback. The Russell 1000 Growth Index is up 24%.
Sure, the surge is because earnings soared for value companies, but that is a trend that could largely remain in place for the longer term.
Just look at analysts’ estimates. Expected earnings growth for value firms is catching up to that of growth firms. The average estimate of long-term growth in earnings per share for the Russell 1000 Value Index is now just over four percentage points below that for its growth-index counterpart, according to RBC data. That is down from a nine-point differential seen in the middle of 2020, before the economic recovery truly kicked in. The last time value’s profit outlook was this bright relative to growth’s was in early 2016.
That means that even now, value stocks have a solid shot at outperforming growth. Data from RBC show a close historical correlation between the outlook for earnings increases among value stocks versus the outlook for growth, and the two groups’ relative performance. The less earnings increases for value companies are expected to lag behind those for fast-growing firms, the better value tends to do.
And right now, the profit-growth forecasts indicate that the value Index should beat the growth index by percentages in the double digits.
It isn’t that there aren’t promising growth stocks out there. The point is that there is plenty of reason for an investor to buy a few more value stocks.
Write to Jacob Sonenshine at [email protected]
