In the last 15 years, investment in the first was the best but this is changing

When trying to differentiate growth stocks vs. value stocksthere is a definition that is more related to the underlying companies: value companies tend to have low ratios such as PER or Price/Value and high dividend yields.

The investment value It is based on the premise that paying less for a set of future cash flows is associated with a higher expected return.

Growth companies assume the opposite. To put it more simply, the values ​​are financial, health, industrial and energy stocks. Growth stocks will mostly be technology related: technology, discretionary consumption and communication services.

In the case of growth investing, their multiples are high due to expectations of growth in future flows and this is discounted in today’s price. For this reason, compared to current fundamentals, they are trading high.

In the last 15 years, technology companies have performed better relative to each other, but there has been such a gap between the two categories that the potential for further adding of growth stocks has been reduced. We review the data.

The great disparity between growth and value

The chart below from JP Morgan Asset Management’s Guide to the Markets compares the 12-month expected PERs of the selective Russell 1000 Growth Index and the Russell 1000 Value Index.

As we can see, the historical average since 1997 shows us a relation of both indices of 0.72 times. Above this mark, we would consider that the growth sector is more expensive compared to the value sector and vice versa.

If we look at its evolution, in the year 2000, the decline of the bubble, the relationship between both multiples of the indices fell to 0.30 times. On the contrary, after the stock market crash that caused the subprime crisis, the spread widened above 1, which presented an opportunity for growth.

But today, the growth sector is trading at an expected 12-month P/E of 30.61 times, while we see value at 15.77 times, which gives us a ratio of 0.52 times, a great distance that we saw for the last time in the year 2000. Levels that set off alarm bells for the outlook for technology stocks.

In the following graph we see the relative profitability of both categories since 1993. As we can see, since then we can differentiate three periods.

The first shows the bursting of the tech bubble of the 2000s. Prior to this period, growth stocks had handily outperformed value stocks, but when that bubble burst, growth stocks vastly underperformed. In the face of the financial crisis, value stocks (led by financials) outperformed and have been underperforming ever since. The third and final featured section shows that growth stocks have set the pace for the market.

Investors have positioned themselves on the side of the technology sector. Companies like Netflix, Amazon, Apple, Meta or Alphabet have set the pace in the markets in recent years. This reality is not permanent market is not permanent. For example, the last 6 months have been led by value stocks and historically this category has done better.

Technology marks a structural change in the development of the economy, but in the present situation it marks an overvaluation of the technological weight What category will mark lead in the coming years?

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