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Philip van Doorn

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Jan. 23, 2022, 2:34 p.m. EST

This is the window of time when value can outperform growth in the stock market

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By Philip van Doorn

Big Tech often hogs all the headlines.

But so far this year, large-cap value stocks — those that typically trade lower to book value and earnings and have slower growth rates — have been outperforming growth stocks.

The policy turnaround by the Federal Reserve toward stifling inflation has led to significant declines for many technology stocks that trade at high multiples to earnings.

Read: Microsoft bets on the metaverse with $69 billion deal for Activision Blizzard

But what might surprise you is that large-cap value stocks as a group are expected to increase earnings per share more quickly than growth stocks this year and for the two years through 2023. Those estimates are below.

Value’s time to shine?

Based on a multi-decade data analysis, John Buckingham, a value stock portfolio manager and editor of The Prudent Speculator newsletter, wrote in a note to clients on Jan. 17 that although stocks in general perform better when the Fed is cutting interest rates, “[v]alue has enjoyed terrific annualized returns, on average, when the Fed is tightening monetary policy.”

See this one-year chart through Jan. 14 showing total returns, with dividends reinvested, for the S&P 500 Index /zigman2/quotes/210599714/realtime SPX -0.38% and two overlapping subsets of the benchmark, the S&P 500 Growth Index and the S&P 500 Value Index:

The value group has been the up-and-comer so far in 2022. Also of note, the yield on 10-year U.S. Treasury notes has increased to 1.84% from 1.52% on Dec. 31 and 1.11% a year ago.

Buckingham wrote: “Value stocks have a long way to go just to make it back to equilibrium with their more richly valued peers.”

This 20-year total-return chart bears that out:

The S&P 500 Value Index has greatly underperformed the S&P 500 Growth Index and the full S&P 500 over the past 20 years, although growth’s outperformance has been most pronounced during the pandemic. The first chart indicates investors’ moods have been changing in favor of value recently, and the Fed’s new anti-inflation stance — its first since the 1980s — might underline a real multiyear run for value.

Another way to test Buckingham’s statement is to look at relative forward price-to-earnings multiples for exchange traded funds that track all three groups of large-cap stocks:

ETF Ticker Forward P/E 20-year average forward P/E Current valuation to 20-year average Current valuation to S&P 500 20-year average valuation to S&P 500
SPDR Portfolio S&P 500 Growth ETF /zigman2/quotes/205259648/composite SPYG 26.24 18.75 140% 127% 121%
SPDR Portfolio S&P 500 Value ETF /zigman2/quotes/203509323/composite SPYV 17.03 13.35 128% 82% 86%
SPDR S&P 500 ETF Trust /zigman2/quotes/209901640/composite SPY 20.73 15.48 134%
Source: FactSet

All three groups of stocks trade high on a forward P/E basis, when compared to their 20-year averages. But the value group’s forward P/E hasn’t risen as much and it is still trading lower to the full S&P 500’s value than it has, on average, over the past two decades.

Quite a bit depends on your own opinion. If you expect interest rates to rise significantly over the next couple of years and for that to help lead to a real change in behavior among stock investors, it’s value’s time in the sun.

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