Insights | June 12, 2017

Whiplash: On Value, Growth, and Ignoring the Fundamentals

Executive Summary

While underperformance is never pleasant, we believe there are “good” and “bad” ways for a value investor to lose over a short time horizon. The first 5 months of 2017 likely fit into the “good” category: The valuations for growth stocks are now pricing in earnings levels that are in excess of analysts’ expectations and the market is applying ever-expanding multiples to growth stocks while global profit margins continue to hover around record highs. This is all classic preamble to value outperforming as an expensive market retreats to lower valuations. Finally, value stocks are currently negatively correlated with 10-year U.S. government bonds and so value is also very well-positioned to benefit from a rising rate environment. With mean reversion, investor behavior, and interest rates all lining up on the same side, things are indeed starting to look up for value.

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