Is growth stock domination coming to an end?

Relatively speaking, it’s been a rough couple of years for advisors with a value investing tilt.

To wit, the iShares S&P 500 Value ETF (Ticker: IVE) has returned just under 4 percent thus far in 2024, around 15 percent over the past 12 months, and 58 percent in the last five years.

Judged alone, these returns are fine. Nothing to write home about, but nothing for a client to truly complain about either.

Unless, of course, that client takes a quick peek at how growth stock investors have been faring over the same periods. If they do that, then they might be ticked off at their money manager because comparatively it’s no contest.

The iShares S&P 500 Growth ETF (Ticker: IVW) is up 24 percent year-to-date, 34 percent since last year and 107 percent in the past five years. Yep, it’s total victory for the growth side.

And while a value stock-oriented wealth manager may want to blame their relative underperformance on Magnificent 7 mania or excessive government spending or whatever else may or may not be pushing the admittedly richly valued, big-cap tech dominated S&P 500 higher, in the end, the scoreboard, and account statements, don’t lie.

All that said, no tree grows to the sky, as the old saying goes, and that includes growth stocks. A change is gonna come, according to value-oriented advisors. It’s just a matter of when.

Cole Smead, CEO of Smead Capital Management, as well as a value-stock proponent, says history shows that the turn to value stocks “usually kicks off with pretty bad markets.”

“We tell our investors straight up that we think the S&P is going to make nothing over the next decade,” said Smead. “Part of that is not because all stocks do poorly, that's a misnomer, it's due to the composition of the S&P 500 and how it's priced.”

As to where Smead believes investors should be allocating assets in the meantime, he says energy is a great area as it was in the 1970’s when inflation was also plaguing the economy.

Christopher P. Davis, partner at Hudson Value Partners, generally favors value stocks “given the long-term outperformance of the value factor being a money-making anomaly within the Fama & French and other data sets.” In his view, the gap between value and growth currently rivals what was seen at the peak of the dot-com bubble and the “meager hunting for plain value” due to the zero-interest rate environment will soon be ending.

“In a more normal environment where capital has a cost, it will be natural for investors to gravitate towards value,” said Davis. “As we think about the rest of 2024, we think there is a great opportunity, even if index returns are muted from here, for the composition of those gains to broaden out to include cheaper companies. Historically, in environments of higher and persistent inflation, as the coming years may be, value does well.”

Christian Bryant, president and chief investment officer at Nold Bryant Planning & Investments currently favors growth over value stocks, but says he is finally starting to see opportunities arise within the value universe. Like Smead, he believes the best chance for value to beat growth will be in a correction that disproportionately affects momentum stocks.

“In election years, seasonality is different and the period between Memorial Day and Labor day is often the strongest period for stocks in a rally that is frequently led by growth stocks,” said Bryant. “The two months preceding election day have historically been a time of lower returns for the stock market and can be a time where value outperforms growth and we would not be surprised to see a similar pattern play out this year.”

Although Davis and Bryant sees a potential turn at hand, Jeff Buchbinder, chief equity strategist for LPL Financial, is sticking with his preference for growth stocks over value - at least for the time being - due primarily to their superior earnings power, bolstered by AI investment. Buchbinder maintains that the odds that growth stocks outperform could increase even further if the economy slows and interest rates come down as he expects them to.

“Elevated growth stock valuations caused us to reduce the size of the overweight recently, but valuations are not great timing tools,” said Buchbinder. “So we’ll be watching for better performance from the cyclical value sectors, particularly financials and energy, before considering a potential shift toward value.”

Along similar lines, Tim Holland, chief investment officer at Orion OCIO, favors growth over value heading into the back half of the year, thinking that absolute and relative revenue and earnings growth – aided by secular trends including AI and cloud computing – should continue to attract capital to “growthier” parts of the market, including communications services and information technology.

“We recognize that the absolute and relative performance of US growth stocks year to date has been astounding – the Russell 3000 Growth Index is up 18% while the Russell 3000 Value Index is 5% – and that at some point, if history is any guide, there should be mean reversion from a style perspective, that value should catch up,” said Holland. “We just don’t think that will prove to be the case this year."