This month, we analyze a recently published research paper from Vanguard that explains why value stocks could be set to outperform growth stocks over the next decade.
Over the past decade, growth stocks like Facebook, Google, and Apple, have outperformed value stocks by a significant margin. Growth stock companies are expected to grow revenue and earnings at a faster rate than the broad market, typically don’t pay dividends, and can see steep price declines if those growth expectations aren’t met. In contrast, a value stock trades at a lower price than what the company’s earnings may otherwise indicate. Vanguard’s research team dug deeper to figure out why growth stocks have performed so well lately and what we can expect from value stocks going forward.
Please click to download “Value vs Growth – The Coming Reversal of Fortune”. Additionally, the PDF is embedded below!Value vs Growth - The Coming Reversal
Vanguard identified factors they believe will help value stocks significantly outperform growth stocks over the next decade. First, Vanguard expects inflation and Treasury yields to be higher over the next 10 years compared to the last 10 years. Both are environments which typically favor value stocks over growth. Second, Vanguard expects strong corporate profit growth in the near future. When growth is plentiful across the market, investors are less willing to pay a premium for it and favor value companies. Lastly, Vanguard anticipates that equity markets will be more volatile this decade than in the previous. With added uncertainty investors prefer the immediate cash flows (dividends) that value companies typically offer.
While it’s impossible to time the market, the logic outlined for value’s future outperformance over growth is sound. It aligns with the understanding that investment strategies move in and out of favor over time, so if you stay disciplined to one strategy, that is diversified and inexpensive, you are more likely to meet your investing goals over time.