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Russ describes the reasons why growth stocks can still outperform value.
People will always prize what is scarce. Given an increasingly erratic trade dispute, low to negative interest rates and softening economic growth, investors are justifiably putting a premium on hedges, yield and earnings growth. The latter dynamic helps explains why, despite a relatively high premium, growth stocks continue to beat value. To the extent economic growth is unlikely to quickly rebound, this trend is likely to continue.
I last wrote about growth and value in early June. During the past three months, U.S. growth outperformance has continued, with growth up 7% versus less than 3% for value.
As discussed in June, growth continues to benefit from an environment of decelerating growth. For example, in June I highlighted the implications of the flattening yield curve, a trend that has only intensified. Since then other indicators have only reinforced the impression of an economic slowdown. Most recently, the U.S.’s main manufacturing gauge fell to multi-year lows, suggesting that the manufacturing sector may already be in a contraction.
The counter-argument to continued growth outperformance: a rich valuation premium. While this is a fair point, it is not the full story. Consider the following:
Growth vs. Value P/E
Source: Bloomberg, September 2019.
The bottom line is not that value will never outperform again. A sharp cyclical upturn, as we experienced in late 2016, could lead to a strong period for value. That said, the tailwinds continue to favor growth, which is why investors should expect to pay a premium for it.