Bryce W. from Charleston, SC asks: Dear Mitch, I’m curious to hear your thoughts regarding value vs. growth stocks in the current environment, and also looking ahead. I know growth had a big post-Covid run but wonder if time is up with higher rates and an outlook for slower growth.
Mitch’s Response:
You ask a really good question – one that can even be a bit puzzling in the current environment. Since we generally associate value stocks as outperforming in inflationary environments, while growth has held up a bit better in recessionary environments, I think both can do well when see the cycle turn.
From a pure valuation standpoint, here’s what we know as of September 30, 20221:
| Style | Current Forward P/E | 25-Year Average Forward P/E |
| Value | 12.09x | 14.09x |
| Growth | 20.38x | 20.72x |
As you can see, both styles are trading at discounts to long-term historical averages, though the value looks a bit cheaper. Growth stocks had a historic run following the Covid-19 bear market, as you mentioned, but have also been sold off fairly indiscriminately in the current bear market – bringing valuations back down to earth. I think you can make the case here that both styles present some unique buying opportunities.
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We know that growth and value tend to swap leadership positions over time, and since the exact timing of these leadership changes is largely unpredictable, I think it makes sense to own quality names across both categories. Value can get you consistent earnings, low debt to income ratios, and generally higher yields. Growth can get you access to innovation and the possibility of big earnings growth. Both have a place in an equity portfolio focused on long-term growth.
Higher interest rates have been framed as a major headwind to growth stocks, which is a valid argument. But that alone is not a good enough reason to eschew the style completely, in my view. Growth stocks are operating in areas of the U.S. economy that are poised to see big innovation and growth in the coming years and decades – software, e-commerce, cloud, energy, and so on. Higher interest rates may result in lower multiples than what investors experienced in the last decade, but they won’t stop that innovation from happening.
Value stocks, too, have a place in portfolios as higher rates are likely to result in slower U.S. GDP growth in the coming quarters. Since they’re generally cheaper than growth stocks and tend to have more stable earnings with lower levels of leverage, I think they’ll hold their own in challenging economic conditions.
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Disclosure