Value outperformance over growth hits 23% in 12 months

Many market watchers have been focused on daily headlines about large-cap tech names and may have missed the extent to which value stocks have beaten growth stocks in the last year.

Shares of blue-chip growth companies such as Nvidia, Broadcom, and Tesla have fallen over the past twelve months. Meanwhile, the iShares Russell 1000 Value ETF, including dividends, has climbed 29%.

By comparison, the iShares Russell 1000 Growth ETF — a direct counterpart to the value-focused fund — has shed roughly 2% of investor capital in the same period.

Regardless of the window chosen — whether 12 months, year-to-date, or half a year — growth stock baskets have consistently lagged value stocks.

Year to date, the underperformance of growth versus value stands at about 23%, which equates to 29 percentage points in absolute terms.

Capital rotation toward value stocks

Over the last year, the price investors are prepared to pay for trailing diluted earnings per share at the largest technology firms has contracted.

The S&P 500 and Nasdaq 100 have each risen by just under 10% over the past year, but those gains stem from increases in total market capitalisation rather than from investors bidding up earnings multiples.

The S&P 500's trailing price-to-earnings ratio has dropped 13% in the past year, moving from roughly 25.8 times to 22.4 times. Over the same period, the average PE of Nasdaq 100 components declined by 20%, sliding from 33.6 times to 27 times.

Some single stocks have seen sharper declines: Amazon's PE multiple has fallen 37% over the past twelve months, while Alphabet's has dropped 45%.

The pullback in growth stocks is still quite new. AI shares sold off after the US midterm elections on November 3, which may lead to regulatory shifts.

Some market participants worried about a slowdown in frontier model development or data centre construction.

Meta allocates about 43% of its revenue to capital expenditures, while Microsoft follows close at 39%. One commentator remarked on the pivot to AI and data centres: “Big tech is undergoing a fundamental transformation, shifting from asset-light to asset-heavy business models.”

Consequently, investors have re-evaluated those stocks. In brief, value investing has returned.