The difference between the expected performance of value and growth stocks are more blurred than ever.
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Whether value or growth stocks will be the better performer within the equity market is becoming less clear. That’s not what matters for investors, anymore.
The two broad classes of stocks have taken turns outdoing the other. Early this year, value stocks, the earnings of which are more economically-sensitive, were the winners. The
Vanguard S&P 500 Value
ETF (VOOV) gained 28% from late September 2020 to mid-March 2021. That trumped the 18% gain on the
Nasdaq 100,
an index comprised of growth companies positioned for fast profit expansion driven by innovation over the long term. During that stretch, markets were reflecting a swift recovery of economic demand as Covid-19 vaccines became available and households were flush with cash from stimulus payments. Since late March, however, the Nasdaq 100 has surged 27% compared with the 8% rise in the value fund.
What’s the outlook for value and growth? On the one hand, real gross-domestic-product growth is expected to slow down in 2022 from 2021, according to FactSet. That doesn’t do any favors for value stocks. On the other hand, prices of many value stocks are already reflecting slower growth, making those shares relatively attractive. The aggregate forward price/earnings multiple for
S&P 500 value stocks is currently about 12 points lower than the index’s growth multiple, whereas the difference has averaged closer to 5 points in the past 10 years, according to Credit Suisse data. So the prices of value stocks aren’t necessarily reflecting their expected earnings growth as much as those of growth stocks.
One factor is plain to see, though. Value gains likely can’t outpace those in growth to the same degree seen early this year. That happens when the economy is in its “mid-cycle” stage, when economic growth slows after an initial burst of post-recession demand. Consistent with that, the value fund’s aggregate expected earnings growth for 2022, 7%, is lower than the expected 9% for the Nasdaq 100.
So whether value beats growth or vice versa doesn’t matter much because the difference will be minimal. “We suggest it’s time to stop investing around growth or value themes, as they do little to identify useful investment opportunities,” wrote Nicholas Colas, co-founder of DataTrek.
What matters now is picking individual stocks that can outperform the broader market by a wide margin. “Stock picking will be key to one’s success more so than ever,” wrote Mike Wilson, chief U.S. equity strategy at Morgan Stanley.
One aspect to consider is quality. The actual stocks can be either value or growth and in any sector, but they should have competitive businesses that ensure stable earnings growth, no matter what the economy is doing. Quality stocks also often have strong balance sheets with minimal debt so when the Federal Reserve raises interest rates, they will be less affected by the higher rates. Already, the
iShares MSCI USA Quality Factor
ETF (QUAL) has gained 26% this year, beating the value fund’s 21% gain, and keeping pace with the Nasdaq 100.
Another promising type of company is one with strong pricing power. High inflation is raising costs, so companies with the best products and pricing power can maintain strong profit growth. Many on Wall street like agriculture and construction equipment maker,
Deere
(
DE
), which has recently raised prices 7% to 8% year over year.
Be selective should be the theme going forward.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
