Just because a trend has run for a decade doesn’t mean it has to end. For example, value enjoyed a similar dominant trend from the mid-1970s to the late 1980s. However, there are a number of factors that favour value over growth companies in 2021 and beyond.
It may surprise readers that in the U.S., growth stocks tends to do better than value stocks during periods of slower economic growth. This is evident in the data (chart 2) although far from a perfect relationship. The reason behind this loose relationship is value stocks tend to be more sensitive to the overall economy while growth stocks are less so. Better economic growth, helps value names more. There is also a scarcity factor: when the economy is growing slowly or even shrinking, fewer companies tend to have positive earnings growth.
This creates an environment where growth is scarce, which can lead to growth companies receiving a scarcity premium. The good news for value in 2021 is U.S. nominal GDP is expected to expand around 8%. This will help lift the earnings of many companies, and given value has more economically sensitive companies, it could easily outperform growth.
Charts are sourced to Bloomberg L.P. unless otherwise noted.
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