Value stocks hit some investors’ radar screens with a performance uptick in the second half of 2024. Yet many portfolios may be unwittingly underweighted in this popular equity style. Tony DeSpirito, Global CIO of BlackRock Fundamental Equities, explains why and suggests an active approach may be the best way to restore a portfolio’s growth/value balance.
The story of market concentration, starring the Magnificent 7 mega-stocks as the primary drivers of return, is not a new one. But it did feature a plot twist in the second half of 2024 when market breadth began to expand and allowed some new winners to emerge. Among the beneficiaries were value stocks.
As we noted in our recent equity market outlook, the market broadening put growth and value stocks in a neck-and-neck race in the latter half of the year. This followed two exceptional years for growth and more than a decade of leadership over value.
To be sure, we don’t believe growth momentum is exhausted. Yet we do see good reasons why investors might consider revisiting ― and potentially increasing ― their exposure to large-cap value stocks.
1. Portfolios may be unintentionally underweight value
One consequence of recent market dynamics favoring growth and tech stocks has been the diminishing representation of value within U.S. large-cap indexes. Growth stocks made up 37% of the S&P 500 Index as of Nov. 30 compared to a historical average of 24%, as shown in the chart below. This concentration may inadvertently leave many portfolios lacking in diversification and underexposed to value stocks. This means the risk of missing the upside of value rallies such as the one that began in July of last year.
Value also can contribute a potential element of portfolio insulation should market winds change. The most recent example of this was in the broad market decline of 2022 when a deep growth dive was offset by modest losses in value.
2. Value is inexpensive relative to history
By their very nature, value stocks are priced below growth counterparts, but the degree of discount has varied across time. Our analysis of growth versus value stocks in the S&P 500 Index finds that valuations would have to rise more than 40% to return value stocks to long-term median levels.1 We believe that means potential for ample upside should value stocks begin to climb back toward historic norms, particularly as lofty growth stock valuations may draw investors toward value as the market begins to broaden and reward company fundamentals beyond the mega-cap leaders.
While history does not necessarily repeat, it is worth noting that the last time the valuation gap between the Russell Growth and Russell Value indexes was as wide as it is today, in December 2000, value stocks significantly outperformed growth over the subsequent one-, three- and five-year periods.2
The case for active value
Intra-year rotations between growth and value leadership are common but difficult to predict. This underscores the importance of maintaining a balance between growth and value in a portfolio to position for changing markets. Yet, as noted above, owning the major large-cap indexes today means owning an outsized share of growth stocks. This suggests increasing a portfolio’s value proposition may be best achieved through an actively managed value strategy.
While generating alpha, or above-market return, can be especially challenging in an environment where market performance is driven by a few dominant stocks, the landscape is slightly different for active value managers. With 869 constituents in the Russell 1000 Value Index as of Nov. 30, more than double the number of companies in the Russell 1000 Growth Index, value managers have more alpha-generating possibilities. Concentration is also less of an obstacle, with the top three stocks by market cap making up 34% of the Growth index versus just 8% of the Value index.3 This allows value managers greater latitude to pursue differentiated investment strategies without the pressure of holding the top names in the interest of benchmark alignment.
Bottom line
Value is a key element of a diversified equity portfolio but is underrepresented in the major stock market indexes today. Our analysis finds that even commonly used value benchmarks are leaning more toward core and growth than they have historically. For these reasons, investors looking to complement or offset growth allocations and restore portfolio balance may be best served by exploring an actively managed large-cap value strategy with a well-honed research and investment process and a record of style consistency through changing market cycles.
1 BlackRock Fundamental Equities analysis with data from Refinitiv as of Oct. 31, 2024. Long-term median is measured from 1978-2024.
2 Analysis from BlackRock Fundamental Equities with Russell index data sourced from FactSet as of Sept. 30, 2024.
3 BlackRock Fundamental Equities analysis as of Nov. 30, 2024.
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