The deviation between value and growth is at a similar size to the height of the dotcom boom, according to Vanguard.
When this bubble popped, the firm said, value stocks went to outperform growth for the next five years.
There was currently a rotation happening between growth and value, after years of underperformance by value, and investors were price conscious and moved into stocks which were trading at low valuations with high dividend yield. This included sectors such as energy, basic materials and utilities.
“The large deviation of growth-stock valuations relatives to our fair-value estimates helps make our case. The size of the deviation is similar to one at the height of the dot-com bubble, when the bubble popped, value proceeded to outperform growth by 16% annualised over the next five years,” said Vanguard.
“Corporate profits should strengthen amid economic recovery from the pandemic. Still, their impact on the ‘fair value of value’ may be modest. The ultimate driver of the rotation to value stocks, then, is apt to be a change in investors’ appetite for risk.”
In light of this, Vanguard said it expected value to outperform growth over the next 10 years by five to seven percentage points, annualised, and possibly by a larger margin over the next five years.
In the US, the Russell 1000 had returned 23% over one year to 19 May compared to returns of 26.9% by the Russell 1000 Value index over the same period.
