Growth stocks are again at elevated valuations. Relative forward P/E – Russell 1000 Growth vs. Russell 1000 Value. Source: FactSet, UBS, as of 14 July 2023

In the first half, the Russell 1000 Value index underperformed the Russell 1000 Growth index by a staggering 24 percentage points, with the value index up 5% versus a 29% rise for growth stocks. This level of underperformance ranks as one of the worst 6-month periods since the inception of the Russell indexes in 1979.

As most investors likely know, growth stocks have risen primarily due to enthusiasm about the opportunity in AI. Cost-cutting, a stabilization in key end-markets (cloud and digital advertising), as well as general economic uncertainty (which tends to favor growth stocks) have also been tailwinds. This has pushed growth stock relative valuations to some of the highest in recent decades.

While it may be tempting to chase growth stocks, we think value stocks should get a closer look. In our thinking, if the economy achieves a soft landing, some cyclical value stocks look quite interesting. Conversely, if the economy slips into a hard landing, growth stock valuations look highly vulnerable.

History also suggests value could be poised for better performance. Since 1979, when value stocks have underperformed by more than 15 percentage points over a six-month period, performance tends to reverse. Over the next year, value stocks outperformed 75% of the time by almost 9 percentage points on average. Over a two-year horizon, value stocks beat growth 90% of the time by 24 percentage points.

Right now, we have a small preference for value stocks in our tactical asset allocation. This seems to be an opportune time for investors to start sharpening their pencils on these market laggards, in our view.

Main contributors: David Lefkowitz, Nadia Lovell, Matthew Tormey

Original report - History favors value , 18 July 2023.