Skip to Content
Market Update

Value Stocks Rally Runs Out of Steam

A look at revival of large growth stocks, and the ebb of small value.

Mentioned: , , , , , , , , ,

The value-stock revival ran out of steam in the second quarter, as large- and mid-growth stocks took the lead in June.

Heading into the second quarter, value stocks were on a long-awaited comeback, having lagged growth for years. (Morningstar Direct clients can find our full first-quarter Morningstar Style Box report here.)

Over the past three months, however, as the quarter progressed, the trend became less clear, with value and growth stocks trading the lead.

But in the weeks since the Morningstar Large Growth Index hit a recent low on May 12, large-growth stocks surged, ending the quarter up 15% and finishing 7% ahead of the broader market. Large value ran out of gas after its fourth- and first-quarter gains.

One aspect of the story is valuations. When the value rally began in October, stocks on that side of the style box were on balance meaningfully undervalued. However, that discount has largely disappeared.

Since March 31, price/fair value estimates of value stocks haven't changed much. But growth companies of all market caps have on average moved further into overvalued territory. 

Sector-level performance underlies growth’s renewed strong run. The communication services and healthcare sectors each contributed more than 2% to this quarter’s large-growth return. But it was technology that led the charge in large growth, contributing 5.5% to the index’s more-than-15% quarterly gain.

Drilling down to the industry level, internet content, software, and semiconductors boosted technology’s gains. Four of the five members of the FAANG group (Facebook (FB), Apple (AAPL), (AMZN), Netflix (NFLX), and Google (GOOG)) make the list of top 10 contributors to large growth this quarter.

Small-value stocks, which led the Morningstar Style Box for the year to date, slowed their gains during the second quarter. In the first quarter, nearly all sectors contributed to small value’s big gains, but saw an across-the-board cooling off over the past three months. Even the energy sector, which led small value with returns of over 22% this quarter, looks less impressive in comparison with last quarter’s 37% return.

Stepping back from the quarter, the longer-term trends continue to reflect the dominance of growth stocks. Over three- and five-year runs, growth has outperformed value, fueled in part by the strong performance of the FAANG stocks.

Lauren Solberg does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.