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Growth stocks are outperforming value by widest margin on record. Why that could soon change.

By Joseph Adinolfi

The divergence between a closely followed growth index and its value counterpart hits its widest level since at least 1991

Value stocks haven't been this cheap relative to growth stocks in more than 30 years. But amid the extreme divergence, some on Wall Street see opportunity.

Since January 1991, growth stocks have outperformed value stocks by a ratio of two-to-one, according to a team of analysts at Jefferies. That's the widest margin of outperformance dating back at least 33 years, the earliest on record.

Fortunately for long-suffering value investors, there are some signs that this trend could be overdue for a reversal. According to Andrew Greenebaum, senior vice president of U.S. product management at Jefferies, a promising signal can be found in the share of earnings revisions for companies included in the value index relative to those included in the growth index.

To wit, the difference between earnings revisions for companies belonging to the Russell 1000 Growth Index RLG and companies belonging to the Russell 1000 Value Index RLV has "fishhooked" in value's favor late last month, the analysts said.

This could be a sign that Wall Street's expectations for growth stocks' earnings have finally peaked.

If that holds, value stocks could be poised for another bout of near-term outperformance, Greenebaum said.

"We're getting to a point where there were fewer upward revisions in favor of growth, and in value there are more relative upward revisions than there were before," Greenebaum said during a phone interview with MarketWatch.

"The trajectory of estimate revisions tends to be one of the most important factors determining the trajectory of stocks," he added. "Better revisions typically means better price action."

Growth stocks have outperformed value stocks consistently since before the financial crisis, with the most recent peak in favor of value stocks occurring in the middle of 2007, Greenebaum said.

To be sure, there have been some exceptions, which mostly occurred during periods where the global economy was just beginning to recover from a downturn. This included a stretch that extended between 2011 and 2014, as the global economy was recovering from the financial crisis and European debt crisis.

Most recently, value outperformed growth during the 2022 market rout, as the iShares Russell 1000 Value ETF IWD, which tracks the value index, fell 9.7% in 2022, while the iShares Russell 1000 Growth ETF IWF fell 29.9%.

But as growth stocks bounced back with a vengeance in 2023, value stocks got left behind once again.

Growth stocks have benefited from a rally in shares of a handful of megacap technology stocks known as the Magnificent Seven.

Shares of these companies - Apple Inc. (AAPL), Microsoft Corp. (MSFT), Nvidia Corp. (NVDA), Tesla Inc. (TSLA), Inc. (AMZN), Meta Platforms Inc. (META) and Alphabet Inc. (GOOGL) - contributed two-thirds of the S&P 500's 26.3% total return for 2023, according to data from Nuveen.

Growth stocks have seen their outperformance accelerate since the beginning of 2024. The ETF tracking growth stocks has advanced 8.7% year-to-date, according to FactSet. By comparison, the value-focused ETF is up 1.1% over the same period, excluding dividends.

There are signs that the pendulum could be swinging back toward value as of Monday. As shares of the U.S. megacap technology stocks retreated, the trend of growth outperforming value slammed into reverse, with the value-stock ETF rising 0.9% to $168.42 a share in recent trade, while the growth stock ETF shed 0.3% at $328.56.

The reversal reflected a broader shift in market leadership, with the Russell 2000 index of small-cap stocks RUT outperforming the highflying Nasdaq Composite COMP on Monday. The small-cap gauge was up 1.9% in recent trade at 2,048, while the Nasdaq Composite was down 0.1% at 15979.

Small-caps also outperformed the S&P 500 SPX, which was up just 0.1% at 5,031 in recent trade. The Russell 2000's advance on Monday pushed the index into the green for the year for the first time since Jan. 1, according to Dow Jones Market Data.

-Joseph Adinolfi

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.


(END) Dow Jones Newswires

02-12-24 1557ET

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