Market Events

Investing in Both Growth and Value May Be Crucial Now

Sébastien Page, CFA, Head of Global Multi-Asset
Key Insights
  • In recent years, growth stocks have significantly outperformed value stocks, prompting investors to ask whether it is time to shift away from growth.
  • Our asset allocation portfolios have a strategic allocation to both growth and value stocks, with a slight tactical overweight to U.S. growth stocks.
  • Given that growth stocks are supported by strong fundamentals, and cheap valuations favor value stocks, investors should—in our view—be well diversified. 


Over the last three years, the Russell 1000 Growth Index has outperformed the Russell 1000 Value Index by over 55% on a cumulative return basis. If you count for compounding, that’s over 15% a year outperformance for growth stocks over value stocks. So, what should investors do? Should they rotate out of growth stocks and buy value stocks, or should they stick with the winning assets class? I would argue that investors should, in this environment, be well diversified between value and growth.

In our asset allocation portfolios, we maintain a long-term strategic allocation to both growth and value stocks, and from a tactical perspective, we are very close to neutral between the two. We have a slight overweight U.S. growth stocks at the moment. Let’s look at both sides of the coin.

First, the outperformance of growth stocks can, in great part, be explained by superior fundamentals. If you look at a chart of cumulative forward earnings over time, you’ll see that the gap in favor of growth stocks, especially recently during the COVID crisis, explains a lot of that massive return differential in their favor. In a low growth, low interest rates, low inflation environment, growth stocks tend to perform better, and they have a sector advantage being more exposed to technology in particular. So, from a secular perspective, there is an argument to be made to favor growth stocks because a lot of those companies are the disruptors rather than the disrupted.

But value stocks do look cheap in the current environment. It’s difficult to estimate forward earnings, but nonetheless, when valuations get extended like that, it’s like a coiled spring. It doesn’t take a lot of good news to get a rally. Also, we have done a study going back 90 years, where we’ve looked at 17 different sell-offs similar to the one we just had in terms 2 of magnitude, and we found that generally speaking when the market recovers, value stocks tend to do better on average. In this market recovery phase, we haven’t seen value stocks outperform yet because of the nature of the shock.

So, those are the two sides of the coin. Fundamentals seem to favor growth, valuations favor value stocks. In that context, it makes sense for investors to stay close to neutral, well diversified between both value and growth stocks.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of June 2020 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal.

T. Rowe Price Investment Services, Inc., Distributor.

© 2020 T. Rowe Price. All rights reserved. T. Rowe Price, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.

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