Topical Research

Topical Research – Investment Cycles in Growth & Value Stocks

August 17, 2022

Summary

Performance Trends

Current cycle of growth dominance has experienced substantial mean reversion from a cycle peak in November 2021

Mean reversion of growth vs. value begs the question: was November 2021 the end of the cycle?

Value has outperformed growth since November 2021, but remains far from the mean over the rolling five-year period

U.S. Large Cap Growth vs. Value: Tech Bubble vs. 2021/22

Growth continues to outperform during risk-on periods

Correlation between value and growth is back near (slightly above) long-term average suggesting the worst of growth’s overvaluation has been wrung out

Growth multiples have risen 7.2x more than value since the GFC while EPS growth rates have only been 1.2x better

Forward-looking valuations have improved dramatically, but earnings estimates will now come into question given potential margin pressure; value still looks relatively cheap

Equity

Value vs Growth

Growth equity prices still not supported by earnings

Market is implying negative perpetual EPS growth for both U.S. and ex- U.S. value stocks

Sector Trends

Growth has significantly more concentration than value in technology and consumer discretionary sectors, far less financials exposure

In the S&P 500, tech and consumer discretionary squeezed out traditional value sectors like energy & financials

In the S&P 500, tech & consumer discretionary squeezed out value sectors like energy & financials, potential for further mean reversion

Long-Term Returns

Large cap growth remains the top-performing long-term style box; small cap growth however has not bested small cap value

Value generally outperforms during risk-off periods, similar pattern playing out in 2022

Value dramatically outperformed growth post tech bubble, but has lagged since the Global Financial Crisis

Trailing returns and volatility

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Definitions

Asset class performance was measured using the following benchmarks: U.S. Large Cap Stocks: S&P 500 TR Index; U.S. Small & Micro Cap: Russell 2000 TR Index; Intl Dev Large Cap Stocks: MSCI EAFE GR Index; Emerging & Frontier Market Stocks: MSCI Emerging Markets GR Index; U.S. Intermediate-Term Muni Bonds: Bloomberg Barclays 1-10 (1-12 Yr) Muni Bond TR Index; U.S. Intermediate-Term Bonds: Bloomberg Barclays U.S. Aggregate Bond TR Index; U.S. High Yield Bonds: Bloomberg Barclays U.S. Corporate High Yield TR Index; U.S. Bank Loans: S&P/LSTA U.S. Leveraged Loan Index; Intl Developed Bonds: Bloomberg Barclays Global Aggregate ex-U.S. Index; Emerging & Frontier Market Bonds: JPMorgan EMBI Global Diversified TR Index; U.S. REITs: MSCI U.S. REIT GR Index, Ex U.S. Real Estate Securities: S&P Global Ex-U.S. Property TR Index; Commodity Futures: Bloomberg Commodity TR Index; Midstream Energy: Alerian MLP TR Index; Gold: LBMA Gold Price, U.S. 60/40: 60% S&P 500 TR Index; 40% Bloomberg Barclays U.S. Aggregate Bond TR Index; Global 60/40: 60% MSCI ACWI GR Index; 40% Bloomberg Barclays Global Aggregate Bond TR Index.