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Growth vs. Value Equities Insights

By Richard "Crit" Thomas, CFA, CAIA
U.S. Equities
Share:
road through the forest

Style Drivers

Conclusion: After a significant cyclical earnings rebound, expected earnings growth and  upward revisions have moderated for the Value Index. We see a mixed picture for Value and Growth. In the near-term, a rebound from lowering COVID restrictions and rising interest rates could benefit the more cyclical Value style stocks. On the the other hand, looking out to the second half, a hawkish Fed and slowing economic growth may lead investors back toward less economically sensitive Growth style stocks. We continue to suggest a more balanced and selective approach to style investing.

Style Cycle Duration & Return

Historical studies demonstrate that the Value style has outperformed the Growth style over long-term periods – domestic or international, large cap or small (Fama and French, et al.). Historically, style leadership changes have typically occurred near the end of an economic cycle as can be seen in the chart below. This did not occur in this COVID-19-driven downturn. We believe this is due in part to the nature of the environment that materially benefited many Growth companies and had the opposite effect on many Value companies. The pandemic may have delayed the transition.

Recently, the relative performance of the Value Index moved up through a long-term downward trendline, which could indicate the beginning of a more sustainable period of outperformance.

Value versus Growth

Sources: Frank Russell Company, Bloomberg

Relative Valuation

Comparative valuation is difficult, as Value sectors and stocks tend toward valuation measures that differ from Growth sectors and stocks. In recognition of this, we have incorporated a number of different valuation measures. While relative valuation certainly leans Value, on an absolute basis the Value Index is not cheap relative to its own history. This helps explain why the Value index did not provide downside protection in the 2020 bear market.  

Relative Valuation Measures
Based on the Russell 1000® Value and Growth Indexes
as of February 2022

*Ranked 1 through 5, where low numbers indicating Value historically cheap relative to Growth and high numbers indicating Growth historically cheap relative to Value.
  Rank 1-5* 
Price/Cash Flow 2
EV/EBITDA  1
Price/Sales  1
Price/Trailing 10 Year EPS  2
Forward P/E  1
Summary Signal (Average)  1.4
 

Relative Valuation - Russell 1000 Value Index/Russell 1000 Growth Index

**Average of the five relative valuation measures.
Sources: Frank Russell Company, Bloomberg

Relative Fundamentals

  • Generally, relative price performance follows relative earnings. It is difficult to compare earnings between the Growth and Value indexes as the Value index has both cyclical (e.g., Financials) and defensive (e.g., Utilities) stock exposure while the Growth index is composed of mostly less cyclical companies. The initial economic rebound helped Value earnings outpace Growth. Yet, the cyclical tailwind appears to be diminishing. Forward estimates for the Value index have not kept pace with the Growth index.
  • Another consideration for longer-term horizons is dividends. Dividend reinvestment has been a key driver to historical outperformance of the Value style over Growth. Currently, the Russell 1000® Value Index has a dividend yield (2.1%) that is more than double that of the Russell 1000® Growth Index (0.8%) as of February 28, 2022. Last year, many dividends were suspended. In the second half of 2021, dividends paid exceeded the prepandemic peak, yet the payout ratio remains well below the prepandemic level.

Russell 1000 Growth Index/Russell 1000 Value Index *Normalization adjusts or rescales the values of different time series to a notionally common scale to allow for comparability.
**The spread is the difference in the normalized units in the chart above.
Sources: Frank Russell Company, Bloomberg

Value Poised to Do Better?

Another way to look at the Growth versus Value story comes from The London Company. Looking at relative returns on a rolling 10-year basis, one can see that the performance of both the Small- and Large-Cap Growth indexes is nearly two standard deviations ahead of their respective Value indexes. The last time we saw this was at the tail end of the Dot-Com boom.  

Annualized Trailing 10-Year Relative Total Return and Annualized Trailing 10-Year Relative Total Return

Source: Frank Russell Company

Glossary of Investment Terms and Index Definitions


Eugene Fama & Kenneth French, The Cross Section of Expected Stock Returns, Journal of Finance, June 1992.

This commentary is for informational purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security. There is no guarantee that the information is complete or timely. Past performance is no guarantee of future results. Investing in an index is not possible. Investing involves risk, including the possible loss of principal and fluctuation of value. Please visit touchstoneinvestments.com for performance information current to the most recent month-end.

Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one on the resources section or call Touchstone at 800-638-8194. Please read the prospectus and/or summary prospectus carefully before investing.

Touchstone Funds are distributed by Touchstone Securities, Inc.*
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crit thomas global market strategist

Richard "Crit" Thomas, CFA, CAIA

Global Market Strategist
Crit is responsible for examining and evaluating economic conditions, generating insights and providing a sharpened perspective on investment strategies for enriched portfolio construction.

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