Bridging the Gap

In recent months, we’ve observed a shift in the performance gap between large cap growth and large cap value stocks. As of June 2024, the index price ratio of large cap growth to large cap value hit 1.5x, marking its highest point since June 2000, near the peak of the dot-com bubble.

While growth stocks, driven largely by a handful of tech giants, have captured much of the market’s attention, history tells us that these periods of extreme valuation disparity often set the stage for a reversion in favor of value.

The last time this gap was so wide was in 2000. From that peak, and over the next seven years, large cap value stocks gained nearly 88% while large cap growth stocks declined by around 27%, resulting in a 115% performance differential (delta). This data suggests that when growth stocks begin to cool, value stocks often take the lead—particularly those with strong fundamentals and sustainable business models.

DUEL EFFECTS

Today’s market, however, is facing a unique set of challenges. After a period of rising interest rates, the Federal Reserve recently shifted course, easing rates to support the economy amidst slowing growth signals. This decrease in rates can benefit both growth and value stocks, but it creates an interesting dynamic: lower rates provide support to high-multiple growth stocks, yet they also benefit value-oriented companies by lowering their debt costs and improving cash flow potential. This “dual effect” of rate cuts might create a broader base for value stocks to thrive, especially in sectors like financials and industrials, which have historically performed well in lower-rate environments.

Adding to the uncertainty, election results may injected additional volatility and hesitation into the markets – through ambiguity regarding future fiscal policies, tax implications, and regulatory stances. Historically, election years tend to increase market volatility, particularly when there’s no clear frontrunner. This kind of uncertainty tends to favor companies with resilient business models, strong cash flows, and more predictable earnings streams—characteristics often found in high-quality value stocks.

CAMBIAR’S FOCUS

Given this environment, our QPD (Quality | Price | Discipline) philosophy at Cambiar has led us to focus on companies with sound fundamentals that can withstand a range of economic conditions. While the market’s recent bias has favored high-growth tech names, we believe this presents an opportunity for disciplined investors to capture value in companies that may be underpriced or overlooked.

Value stocks, particularly those aligned with our QPD approach, are often companies with stable cash flows and competitive advantages in sectors that benefit from economic resilience, such as healthcare, utilities, and select financial services.

Although no one can predict exactly when the pendulum will swing back towards value, history suggests that the current performance gap between growth and value stocks could be a signal of change. As we navigate an unpredictable election, lower interest rates, and overall market uncertainty, value stocks—especially those with solid fundamentals and favorable valuations—offer a potentially attractive alternative to high-flying growth stocks that may face headwinds. For investors seeking a balanced approach in uncertain times, value-oriented investing could serve as a stabilizing anchor, providing the resilience needed to weather whatever lies ahead.