Value stocks beat growth when inflation is high. Here are 13 stocks top newsletters are betting on now.

By Mark Hulbert

Many portfolio experts are wrong about what drives value outperformance. This single metric explains why.

Value stocks will continue to beat growth stocks so long as U.S. inflation remains elevated.

This relationship between inflation and value stocks' outperformance is often overlooked. Many investment experts mistakenly believe that a strong economy, not inflation, is the key to value stocks beating growth stocks. But they're wrong: Assuming inflation stays constant, robust economic growth helps growth stocks just as much as, if not more than, value stocks.

The reason inflation plays such a crucial role in the contest between value versus growth is that a large share of growth stocks' valuations comes from earnings projected several years into the future. Higher inflation means that those future earnings must be discounted to a much greater extent when calculating their present value. Value stocks, in contrast, are more heavily based on current earnings, which don't have to be discounted as much.

The current market provides a good illustration of this relationship. The consumer-price index's trailing 12-month rate of change jumped to 4.2% in the most recent month, up from 3.8% in the prior month and 2.4% a year earlier. Value's alpha over growth over the past month is 4.4 percentage points. That translates to an annualized alpha of more than 60%.

This recent example is consistent with the historical record, as you can see in the chart above. To construct it, I divided all months since 1947 into four groups, depending on how each month's trailing 12-month CPI inflation rate compared with where it stood a year previously. Notice that value's alpha is the greatest when inflation is the highest relative to where it stood a year prior, and vice versa. This pattern is significant at the 95% confidence level that statisticians often use when assessing whether a pattern is genuine.

Almost all of the investment newsletters whose returns are audited by my performance-auditing firm are betting that value stocks will continue outperforming growth stocks in coming months. Of the 15 stocks currently recommended by at least three monitored newsletters, 13 fall into the value camp - defined as having price/book and forward P/E ratios below those of the S&P 500 and dividend yields above that index. By implication, that means the editors of these newsletters believe that inflation will remain elevated for some time.

These 13 highly recommended value stocks are listed below, in alphabetical order.

 
Ticker  Stock                      Forward P/E  Price/book ratio  Dividend yield 
ABT     Abbott Labs                16.3         3.1               +2.7% 
ADM     Archer Daniels Midland     15.4         1.6               +2.7% 
APD     Air Products & Chemicals   19.8         4.0               +2.6% 
BAC     Bank of America            12.1         1.5               +1.9% 
CMCSA   Comcast                    6.4          0.9               +5.7% 
CVS     CVS Health                 13.3         1.7               +2.5% 
DIS     Walt Disney                13.5         1.6               +1.5% 
FITB    Fifth Third Bancorp        13.1         1.6               +2.8% 
GIS     General Mills              11.5         2.1               +6.8% 
MS      Morgan Stanley             17.2         3.2               +1.9% 
PFE     Pfizer                     8.4          1.5               +7.1% 
SCHW    Charles Schwab             13.6         3.7               +1.4% 
SNA     Snap-On                    19.5         3.5               +2.5% 
                                                                  Source: LSEG, Hulbert Ratings 

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

-Mark Hulbert

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06-30-26 0921ET