Can Value Stocks Really Make a Comeback? (2024)

For value stock investors, 2024 looked like another “Wait ‘til next year” scenario, with mega-sized technology stocks driving the market higher. However, after months of lagging behind growth stocks (especially those riding the artificial intelligence wave), value stocks surged ahead this past week.

A prime catalyst came from geopolitical concerns threatening the AI-driven boom in semiconductor stocks. At the same time, growing confidence that Federal Reserve rate cuts are finally on their way has the potential to make the dividends offered by many value stocks more attractive.

Both the Morningstar US Large Value Index and the Morningstar US Large Growth Index have returned roughly 13.6% since the start of the year. As of Wednesday’s close, the growth index had fallen 3.97% in a week while the value index climbed 3.39%. Is this the start of a value stock rally, or another headfake? Some analysts say value stocks could remain on top in the coming months, while others say the AI train shows no signs of slowing.

Growth Stocks Have Dominated the Market

Investors define growth stocks as companies with the potential to outperform the market down the road, even if they may be unprofitable or expensive now. That means a lot of potential rewards for investors, but a lot of risk too. Big tech stocks like Nvidia NVDA, Apple AAPL, Amazon AMZN, Microsoft MSFT, and Meta Platforms META fall into this category.

“Growth companies tend to be companies that win because they gain market share, or they’re in an industry that’s growing,” regardless of whether the economy is expanding, explains Tim Murray, a capital market strategist at T. Rowe Price.

Value companies, on the other hand, tend to do well when the entire economy grows. They’re established companies with steady profits, they often pay dividends, and investors like them because they’re seen to be trading at a discount compared with what they’re intrinsically worth. Banks, utilities, and healthcare companies fall into this category.

For much of the stock market’s history, value companies outperformed their growthier counterparts. But the script has been flipped over the past decade. The disparity has grown as the AI trade propels tech companies higher and the market becomes more concentrated. Over the past 10 years, the Large Growth Index has returned 258%, while the Large Value Index has returned 148%—more than 100 percentage points less. Over the past 20 years, the growth index has returned 644% compared with value’s 392% returns—an even larger differential.

The gap has narrowed in recent days as part of a rotation sparked in part by cooler-than-expected inflation data. As investors gain confidence that the Fed will cut interest rates this year, it appears they are turning their focus from big tech toward less-loved areas that may benefit from a new interest rate regime and a steadily growing economy. Worries about new regulations surrounding semiconductors have also dragged growth stocks lower.

The Case for Large-Cap Value Stocks

Some strategists were bullish on the category before this week’s dramatic rotation. In June, Bank of America head of US equity strategy Savita Subramanian told an audience at the Morningstar Investment Conference: “I have one message to you: Buy large-cap value.” She believes the market’s growth is finally broadening. “We’re hearing that companies outside of tech are ratcheting up their earnings expectations,” she said. That includes retailers, healthcare companies, and more. She’s especially bullish on large-cap energy and financial stocks, which she describes as having a bias toward quality.

One of the most compelling arguments for value stocks is their low price tags. The “value” element comes from the fact that they often trade at lower multiples than other stocks on a relative basis. However, there are degrees to which they can be undervalued compared with their long-term intrinsic value. Right now, as a group, value appears particularly cheap.

While the recent outperformance of mega-cap growth stocks has been driven by “really good fundamentals,” according to Murray—strong earnings growth, strong cash flow, and high margins—that outperformance is now priced in. With expectations for these companies high, any sign of weakness “could push growth stocks down pretty quickly.”

Meanwhile, value stocks are looking cheap. “Those are the companies that are really neglected, trading at very low multiples,” Subramanian said. That means potential upside for investors, even if that upside may not come with the larger-than-life earnings beats that companies like Nvidia and Microsoft have been delivering.

“We believe a lot of these companies have great earnings growth prospects, especially if the economy is going to be stable,” says Deepon Nag, a large-cap value portfolio manager at ClearBridge. “Right now, you can buy those earnings streams at cheap multiples.”

Along with those decent earnings, investors “won’t have as much to worry about should the whole AI situation falter,” Murray adds.

Not All Value Stocks Are Alike

Strategists say investors need to look beyond the broad “value” label to identify quality companies in this category. “I don’t think you can paint them with one brush,” says Steve Sosnick, chief strategist at Interactive Brokers. He recommends making a distinction between cyclical and non-cyclical stocks. Cyclical stocks tend to rise and fall alongside the economy—luxury goods, restaurants, hotels, etc. Financial stocks are often considered cyclical, as are real estate stocks. Non-cyclical companies perform more consistently regardless of the economic backdrop. They make products or services that consumers buy no matter what.

Murray agrees. While value stocks tend to be more economically sensitive than growth stocks, “there is a portion of the value universe that doesn’t fit that profile,” he says, including consumer staple stocks and utility stocks.

“There’s always a case to be made for the things that people need and use every day, regardless of cycles,” Sosnick adds. “If you get into a recession, people cut back, they spend less, but for the most part, these companies can be quite resilient.” In that same scenario, however, Sosnick points out that cyclical stocks could continue to underperform.

Value Offers Dividends

Another way to play “value within value” is to look at dividend yields and income, according to Murray. Value stocks often pay dividends to investors. Unlike growth companies, they don’t need to reinvest as much of their profits in their businesses. That means they can afford to return cash to shareholders. Non-cyclical stocks like utilities and staples tend to have less earnings variability too, Murray says, making them especially “good income-oriented stocks.”

Dividends could be even more alluring for investors once the Fed begins to ease policy and interest rates remain higher for the foreseeable future, arresting the massive expansion that has benefitted the growth category for a decade. “I think over the next 10 years, we [will] get our returns more from income rather than price appreciation,” Subramanian said. That means “value wins, growth loses.”

Could Value Stocks Break Out?

Over the long term, Murray says the best-case scenario for value companies would be a strengthening economy. He says that’s different from what we see now, a likely soft landing and a transition to slower growth. “For value to win, you probably need to see the economy get a bit stronger,” he says.

Nag points out how a slow-growth, low-inflation environment in the aftermath of the 2008 financial crisis made it difficult for the economically sensitive category to outperform growth. But economic growth on the order of 4% or 5% would be “really, really good for value stocks.”

Murray thinks the category could also see a boost if the beneficiaries of AI—now confined to semiconductor stocks, utilities, and a handful of tech giants—broaden and more firms take advantage of the trade. But that’s “probably at least a year away,” he says. Of course, AI also poses risks. For now, strategists say the surge of investor interest in firms like Nvidia will be tough to compete with. “It’s really hard to fight a runaway momentum train,” says Sosnick. Nag adds that there’s a chance AI will fundamentally change the way many companies operate, which would force investors to be even more selective about their value bets.

Should Investors Own Large-Cap Value Stocks?

Even if value stocks never outperform their growth counterparts, there are compelling reasons for investors to own them. Strategists say that some exposure to the comparatively cheap sector (especially the non-cyclical, dividend-paying slices) could be a powerful protection against losses should the AI trade turn around.

Losses in mega-cap growth companies could reverberate through the entire market, according to Sosnick. These stocks pulled the major indexes higher as they climbed, and they can just as easily drag those indexes lower if they stumble. “If you start to see those stocks sell off in a meaningful way, it’s going to drag down all boats,” he says. In that environment, where can investors hide? “Large-cap value is one of those places ... It doesn’t mean you’re necessarily going to make a lot of money. But on a relative value basis, you’ll do much better. And you’ll generally get a nice dividend on top of it.”