Asset Allocation Video

Sticking With Value
Tim Murray, CFA Capital Markets Strategist, Multi-Asset Division
Key Insights
  • The value rally has recently fizzled, and growth stocks have regained ground, narrowing the performance gap considerably.
  • Despite strong fundamentals, growth stock valuations are extreme. The Asset Allocation Committee favors value stocks as potential catalysts could be supportive.

From November 2020 to early May 2021, U.S. value stocks generated strong absolute and relative performance versus U.S. growth stocks, a trend also seen in global equity markets.

Key Insights
  • The value rally has recently fizzled, and growth stocks have regained ground, narrowing the performance gap considerably.
  • Despite strong fundamentals, growth stock valuations are extreme. The Asset Allocation Committee favors value stocks as potential catalysts could be supportive.

From November 2020 to early May 2021, U.S. value stocks generated strong absolute and relative performance versus U.S. growth stocks, a trend also seen in global equity markets. However, the value rally has recently fizzled, and growth stocks have regained ground, narrowing the performance gap considerably (see Figure 1).

While somewhat unexpected, the resurgence in growth stocks is supported by their attractive fundamentals—very strong revenue growth amid increasing margins over the past 10 years—versus value stocks. Going forward, investors should weigh whether or not these trends that have boosted growth stocks over the past decade will continue to prevail.

Notably, the pandemic strengthened some technology trends, including online retail, social media, video streaming, and cloud computing, and new trends—such as the push toward renewable energy—could provide additional tailwinds. However, with these high expectations, growth stock valuations have been driven to extreme levels relative to value stocks (see Figure 2), leaving little room for error should outcomes disappoint.

In our view, the significant valuation difference between growth and value stocks may not be sustainable, and potential catalysts, including higher inflation and rising interest rates, could narrow the gap in the medium term. In the U.S., increased government spending, higher taxes on foreign earnings, and tighter regulation of technology companies could also be supportive.

We believe that these conditions, should they materialize, would likely favor value stocks and be a headwind for growth stocks. As a result, the Asset Allocation Committee maintained our tilt toward value stocks.

A Short-Lived Value Rally

Stronger fundamentals for growth stocks, but valuations are extreme

(Fig. 1) Value vs. Growth (Total Return, 11/6/20 to 7/28/21)
(Fig. 2) Forward Price/Free Cash Flow Ratios (Month-end January 2007 to June 2021)

Past performance is not a reliable indicator of future performance.
Sources: Russell. T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved. See Additional Disclosures.

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Additional Disclosures

Financial data and analytics provider FactSet. Copyright 2021 FactSet. All Rights Reserved.

Frank Russell Company (Russell) is the source and owner of the Russell index data contained or reflected in these materials and all trademarks and copyrights related thereto. Russell® is a registered trademark of Russell. Russell is not responsible for the formatting or configuration of these materials or for any inaccuracy in T. Rowe Price Associates’ presentation thereof.

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 August 2021 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 concerning investments, investment strategies, or account types, 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. Please consider your 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. Actual future outcomes may differ materially from any estimates and forward-looking statements made.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. The value approach to investing carries the risk that the market will not recognize a security’s intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. All charts and tables are shown for illustrative purposes only.

T. Rowe Price Investment Services, Inc.

© 2021 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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