Valuation Spreads Continue to Favor Value Stocks

In a recent Substack column, The Curious Case of “Dead” Factors, I showed that reports of the death of the value premium were premature. Over the almost six-year period from October 2020 through August 2026, the Dimensional US Marketwide Value Index returned 17.9% per year, outperforming the CRSP 1-10 Index by 4.9 percentage points per year, and the Dimensional International Marketwide Value Index returned 21.3% per year, outperforming the Dimensional International Marketwide Index by 7.9 percentage points per year.

To understand the shift in value stocks’ fortunes, we need to look at the best predictor of factor premiums. Just as equity valuations are the best predictor of the equity risk premium, the valuation spread between value stocks and growth stocks is the best predictor of the value premium. That said, in the short term, valuation spreads have little predictive power. Over longer horizons, such as 10 years, they do provide valuable information.

The late 1990s dot-com bubble caused a dramatic widening of valuation spreads, as the price/earnings ratios of growth stocks rose to record levels. This led to a negative value premium and prompted the first wave of declarations that value was dead. When the dot-com bubble burst in March 2000, those spreads narrowed, and value delivered strong outperformance until the global financial crisis. Then, from 2009 through 2017, there was little, if any, value premium, with value stocks and growth stocks delivering similar returns.

However, from 2018 through September 2020, valuation spreads widened to levels comparable to those seen at the height of the dot-com bubble. That produced perhaps the worst stretch for the value premium on record. As just one example, Dimensional’s US Small Cap Value Fund DFSVX lost 9.0% per year over this period, underperforming the S&P 500 index’s 10.8% annual return by nearly 20 percentage points a year.

It is also important to note that small stocks significantly underperformed during this period. While the S&P 500 index returned 10.8% per year, the CRSP 6-10 small-cap index returned just 1.7%, an underperformance of 9.1 percentage points.

That made it a double whammy for small-value investors as both the size and value factors provided negative returns.

While the media again declared the value premium dead, widening spreads suggested it was likely to reassert itself—and possibly exceed its historical average, which is, in fact, what happened.

Where Are We Now?

AQR’s large-cap data through September 2026 shows that for the US and emerging markets, while the valuation spread has narrowed, it remained historically wide at the 80^th percentile and 62^nd percentile, respectively. For developed international markets, the spread was below its historical average, at the 42nd percentile. That is not surprising, because the value premium has fared much better in international markets than in the US since 2009.

The Bottom Line

While no one has certainty about future returns, current valuation spreads still support the case for a future value premium. This is particularly true in the US and emerging markets, where spreads remain historically wide.

Postscript: The following chart from AQR presents the CAPE ratios as of September 2026.