MW These two-dozen value stocks are poised to lead the stock market

By Mark Hulbert

Investors are realizing that they no longer can count on lower interest rates and inflation to support higher stock and bond prices

Value stocks are poised to outperform growth stocks.

That's because it's gradually dawning on investors that they no longer can count on lower interest rates and inflation to support higher stock and bond prices. They are realizing that inflation expectations are now increasing, not falling, and that the Federal Reserve's next move may be to raise rates rather than lower them.

Conventional wisdom holds that value should outperform growth at times like these. That's because of the outsize share of growth-stock valuations that come from future years' earnings - the present value of which falls as inflation and interest rates rise. This discounting has less of an impact on value stocks because a greater share of their valuations comes from current earnings.

This conventional wisdom has yet to translate into value stocks' relative strength, however. Since the S&P 500's SPX all-time high in December, the Vanguard S&P 500 Value ETF VOOV has lost significantly more than the Vanguard S&P 500 Growth ETF VOOG - losing 6.3% versus 2.7%. Value stocks are also behind growth issues for year-to-date performance.

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One big reason why value stocks have not yet overtaken growth stocks is that it takes Wall Street a long time to shed out-of-date narratives. Yale University finance professor Robert Shiller explored this in his book "Narrative Economics": A new narrative will go viral, replacing the prior one, when enough investors give up trying to explain what's happening to their portfolios with that old narrative. Since most investors have lost money over the last month, it's a good bet that they will soon start looking for a new narrative.

When that happens, look for value stocks to exhibit relative strength. With that thought in mind, I searched for value stocks among those that currently are recommended by at least two of the investment newsletters whose returns are monitored by my performance-auditing firm. A stock was considered in the "value" category if its dividend yield was higher than the S&P 500's, and if its forward price-to-earnings ratio, forward price-to-sales ratio and price-to-book ratio were each lower than the S&P 500's.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

-Mark Hulbert

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January 14, 2025 07:00 ET (12:00 GMT)

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