over 3 years ago • 2 mins
The relative performance of growth versus value stocks hit an all-time high at the end of June. Investors are now wondering if this heralds the death of value or if there’s still, erm, “value” to be found.
As a reminder, value stocks trade at low prices relative to fundamental measures like earnings per share or book value. So-called growth stocks, unsurprisingly, exhibit high long-term earnings growth and as such tend to trade at much higher prices relative to their fundamentals.
The chart below compares the performance of growth stocks versus value stocks in the US, and the relative performance between the two hit an all-time high at the end of June.
And this chart shows the forward P/E ratio of growth stocks is more than one standard deviation higher than value stocks relative to history. That’s the highest since the dot-com era two decades ago.
Household tech names like Facebook, Apple, Amazon, Microsoft, and Googleare among the growth stocks that have led the stock market rebound since March. In fact, these five firms now occupy the top spots as the US’s biggest companies. One reason why they’ve performed so well is that their internet-based businesses not only withstood the economic shock from coronavirus, but in some instances benefited.
Another reason that could explain the valuation gap between growth and value stocks is that in an environment where the economy is shrinking and corporate earnings are declining, investors are willing to pay more for stocks of companies that can still grow their earnings. Put differently, in an economic recession like now, growth is scarce and so investors have to pay more to access it.
That leaves investors with two schools of thought. Some argue that “value is dead” because of growth stocks’ role in technological disruption (have a look at this research paper if you’re interested in this argument). Others believe it’s just a temporary dislocation and that cheaper value stocks will eventually start to outperform growth stocks. To reflect your view, you can use exchange-traded funds. Two popular ones in the US are IWF for growth and IWD for value.
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