Value stocks are having a rare moment in the face of this year’s equity selloff. The upcoming earnings season will help determine whether the group’s outperformance against the market’s high-flyers can persist.
The S&P 500 Value Index — home to shares of banks, consumer staples, health care and other companies that appear cheap compared to fundamentals — is up 0.4 per cent this year, versus a 6.5 per cent decline for its flashier, growth-focused counterpart. If that holds through the end of March, it would be the value gauge’s best quarterly run against its rival since the market meltdown of 2022.
Worries over historically elevated tech stock valuations, combined with a tariff-induced bout of risk avoidance, have driven the recent rotation from growth into value. While such moves have been short-lived in the past, investors say this time around, profit expectations are so modest that value-oriented companies have a good shot at beating them when earnings season kicks off next month.
“The bar has been set pretty low for value stocks compared to the uncertainty surrounding growth names and their ability to deliver on earnings estimates,” said Dan Morgan, senior portfolio manager at Synovus Trust. “If value can at least match or slightly beat expectations, the runway is clear for them.”
Analysts expect earnings for value companies to fall by 12% in the first quarter from a year earlier, compared to a 20% jump estimated for growth companies, data compiled by Bloomberg Intelligence showed.
Proponents of value stocks argue that their relatively cheap price already reflects the weak earnings expectations for the group. Meanwhile, the market’s hopes for growth companies have risen extensively in the last few years, as excitement over the potential of artificial intelligence fueled massive gains in technology shares.
The S&P 500 Growth Index trades at a forward price-to-earnings multiple of about 25 times, compared to 18 times for the value index. The so-called Magnificent Seven group of tech-focused stocks, which includes massive companies such as Nvidia Corp. and Apple Inc., trade at an average of 27 times earnings.
Rare Outperformance
The S&P 500 Value Index has outperformed its counterpart on an annual basis only five times in the past two decades. In that span, the value index has risen by 202 per cent, compared to a 600 per cent gain for the growth index.
“Growth is about 40 per cent more expensive; this outperformance of value was very long overdue,” said Michael O’Rourke, chief market strategist at JonesTrading Institutional Services. “Due to the incredible strength of the Magnificent Seven, too many investors crowded into growth thinking it won’t correct.”
Of course, the valuation comparison can work both ways, with the sharp selloff in growth stocks making them far less expensive than in the past. The average valuation for a stock in the S&P 500 Growth Index has fallen by 32 per cent since mid-July, according to data compiled by Bloomberg. For the value index, it has risen by about 9 per cent over the same time.
That could make growth stocks an attractive proposition if tariff worries dissipate and risk appetite returns. Some market participants are already considering buying the dip.
“Our bias is to be long riskier factors” over the coming months, said Dennis DeBusschere of 22V Research. “Recession risk is declining as tariff details come out.”
For now, however, value bulls are happy to keep the faith — and wait until earnings season rolls around.
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