Why Value Stocks Could Beat Growth Stocks in 2022 and Beyond

What You Need to Know

Research Affiliates and Vanguard strategists think so, due to rising inflation and interest rates.
But rising inflation hasn’t yet pushed bond yields above key levels.
The overvaluation of growth stocks is another key factor.

It’s too early to tell if value stocks will outperform growth stocks this year, but if interest rates continue to rise along with rising inflation they very well could, according to Chris Brightman, CEO and chief investment officer of Research Affiliates, a financial strategies research firm specializing in asset allocation and smart beta.

“It will be one catalyst or another that creates the mean reversion from today’s absurdly stretched valuations between value and growth stocks,” Brightman tells ThinkAdvisor. “Inflation causes rising interest rates and rising interest rates could be the catalyst for the correction in the stock market.”

The stock market action of the new year suggests that is starting to be the case, he said. “We’re barely into January 2022 and the relative performance in the first week or so shows that high-flying growth companies with high multiples are underperforming.”

Indeed, the Russell 1000 Value Index of large-cap value stocks gained 1.12% year-to-date through Thursday, compared with a 5.90% decline in the Russell 1000 Growth Index. The Russell 2000 Value Index of small-cap stocks lost 0.27%, compared with a 7.5% drop for the Russell 2000 Growth Index.

In 2021, however, only small-cap value stocks, not large-cap value securities, outperformed their growth counterparts. Large-cap value stocks underperformed because they excluded the high-flying FAANG — Facebook (now Meta) Amazon, Apple, Netflix, and Alphabet (formerly Google), Brightman said.

Inflation indicators have been showing substantial increases. On Wednesday, the U.S. government reported that its consumer price index rose 7% last year, its biggest jump since 1982. On Thursday it reported that producer prices climbed almost 10% (9.7%) in 2021, the steepest rise since 2010.

Interest rates, in turn, are climbing to their highest levels in two years, but the 10-year Treasury yield is still under 2% and the two-year Treasury yield is under 0.95% — currently near 1.75% and 0.95% respectively. On an inflation-adjusted basis, those yields are still negative.