Could Value Stocks Make a Comeback?

Could Value Stocks Make a Comeback?

Anu Rajakumar: Over the past decade, growth stocks, particularly those in the technology sector, have dominated global equity markets driven by innovation, secular tailwinds, and investor enthusiasm. As we navigate a changing and more complex macroeconomic environment, the tide may be shifting. Elevated valuations for growth stocks and increased market volatility are prompting investors to reevaluate their exposure to value equities. With the potential for broadening market opportunities, could this be an opportune moment for US large-cap value?

How should investors think about the role of value amidst these dynamics and what risks and opportunities lie ahead? My name is Anu Rajakumar and joining me today is David Levine, associate portfolio manager of the large-cap value fund at Neuberger Berman. David's here to help us unpack the current environment for US large-cap value, explore the opportunities across sectors, and discuss how investors can navigate the complexities of a market that's increasingly challenging the growth versus value narrative. David, welcome to the show.

David Levine: Thanks, Anu. Thanks for having me.

Anu: David, growth investors have had a very strong run for a number of years. Just to set the table a bit, just how growthy have things gotten in terms of market concentration and equity valuations?

David: I think you're being kind. Even though you said "very strong," I think it's been significant. If you look back the past two years, the Russell Growth Index has outperformed Russell Value by 60 percentage points. That's only happened two years in the index's history, two calendar years at least. One was 1998, '99, and we all know what happened after that.

The other one was 2019, 2020, which was COVID, which we could talk about a little bit later about how maybe that should have been, was setting up to be the turning point, but then things got pushed out because of some of the extraordinary measures that got taken from a monetary and physical perspective during COVID. If you look at the Russell 1000 Growth Index, two names make up roughly 25% of the index. Five names make up 50% of the index. Those same five names are 25% of the S&P.

If you look at price-to-book, price-to-sales, the spread between growth and value are at a 30-year high. If you look at PE, the only other time that spread has been wider is the dot-com bubble. If you look at the number of names in the growth index and the value index, the Russell 1000, as the name suggests, largest thousand stocks in the United States, is split up between growth and value by market cap. The growth index currently has 394 names. The value index has 870 names. It has never been that exaggerated on either end of the spectrum. I would say we're pretty concentrated and valuations are pretty widespread.

Anu: Okay, so maybe very growthy was an understatement then. We produced our solving for 2025 publication earlier this year. In that, we did note that a broadening equity market could finally provide a tailwind for value. Dave, I'm curious. Why do you believe value has had such a tough stretch relative to growth and what macro drivers do you think give you reason to expect that story to change over the next few years?

David: I think I could rephrase your first question as, "David, why do you look like you haven't slept in seven-plus years? What's going on?" I think there are a couple of tailwinds for growth. You had interest rates basically go to zero, which as you look at valuations, that's going to benefit growth stocks way more than it benefits value stocks. Then you had a lot of liquidity pumped in post-COVID that really crowded into the Magnificent Seven.

Now, post that in the past two years, let's say, you've had the AI/Internet 2.0, which has really gotten things going even more so for those growth stocks and, in most cases, for valid reasons. Maybe the valuations have gone too far, but the fundamentals were really good for some of those companies. Outside of the realm of what we do, the valuations didn't make sense for us to own them in our portfolios. I think there's a point now where there's a broadening out of growth in the economy. You're seeing a little bit of a hint that we could see a normalization of valuations. As you see that, I think that's the beginnings of the drivers for value to outperform over the next few years.

Anu: You said you're seeing the hints. We could see some normalization. One of those signs might be volatility, which has risen in the wake of rising tensions over the recent tariff announcements. What are some of the other hints that you've been seeing? What does history suggest about the relationship between the volatility that we've been seeing and relative performance of value versus growth stocks?

David: Yes, so there are lots of different definitions that you could put around volatility in terms of, what does it mean for the markets? I like to think about it as, what are the markets telling us? Volatility to me tells me that the market doesn't know which direction it wants to go in. If you simply look historically on a calendar year basis at the number of days, there's been more than a 1% spread between value and growth on any given day. You would see that in most normal times, it's less than five times in any given year.

It's very, very low. Those two large-cap indices are very correlated. You don't really get to see a large spread. In certain periods, there are significant spikes in those numbers. 100 out of the 250 trading days of the year, you'll see a bigger spread than 1%. In each of those periods, it's been a transition period. The first time actually that we saw significant volatility in that spread was 1998 through 2002. That was the end of the dot-com bubble, which basically was the handoff from growth to value.

The next time we saw that was 2008, 2009, when the value market ended and handed off to the growth market. Now, more recently, basically, for the past four years, we've been seeing a spike in that number again. I think that's the beginning of the market telling you, "Yes, these have been the leaders," but we don't know that they're going to continue to be the leaders in the next phase of the market. You're seeing that in potential handoff if history repeats itself, which, typically, it does at some point, you will see that handoff from growth to value.

Anu: It sounds like we could be in that important inflection point as you said. Let's drill down a bit to the sector level. When most of us think of growth, we're thinking of technology. In particular, those mega-cap technology names that we've been hearing so much about. Are there certain sectors that tend to favor value over growth and how might those value-oriented sectors be poised to outperform in the coming years?

David: Sure. The biggest sector in large-cap value is financials. When you think about financials and you think about a yield curve that was inverted with interest rates artificially suppressed, and now we're in an environment where yield curve has normalized a little bit, you have less regulation on the horizon. They're very well-capitalized. It will play out depending on what happens with loss rates in their lending portfolios. Financials are set up from a valuation perspective and from the fundamentals to potentially outperform here.

Another large area in value is energy, metals, and mining. I don't know when this podcast is going to come out, but there's obviously been a little bit of volatility in the energy space these days. We do think that up until now, the global demand picture has been pretty healthy. There are now questions around that if you think about what tariffs are going to do, and is that going to impact the global demand? TBD on that one. It clearly is one of the two cheapest groups in the market from a valuation perspective.

Another area that I would just mention is more cyclical areas like the industrials and the metals and mining companies. Not the industrials that have done well because of their AI exposure but the industrials that have not done well. From a valuation perspective, they're also a relatively cheap group. As the economy goes through a reset to the beginning of the economic cycle and growth spreads out, we believe those companies are poised to benefit. On the metal side, if there is inflation, the Fed seems to have gotten inflation to a better place, but it's not necessarily fully under control yet. If there is inflation there, the metals companies will benefit.

Anu: Sure. Now, just digging a little bit more about your approach to assessing the opportunity set. We've all heard this idea that not all value stocks are created equal and you'd want to make sure that you avoid value traps. In your research process, how do you go about sifting for the winners, avoiding those value traps, particularly in this age where the new cycle really seems to be constantly changing every 10 minutes or so?

David: From a fundamental perspective, doing the due diligence on companies is at the core of what we do here in general at Neuberger. Specifically, on our team, we have a great central research team. They have a big data team that sits with them. We interact with them all the time. In terms of identifying ideas for us, we're thinking about things from a normalized earnings perspective.

We're thinking about, where are the cheapest opportunities in the market based on normal? We try to take out some of the cyclicality. We try to take out some of the uniqueness in any given environment and really look at, what is the company going to look like over a longer-term period of time? Where's the opportunity for potential margin expansion and then where is the catalyst that's going to get the company from where it is today to that normalized level so that we don't end up in a value trap?

Not all value is created equal. The big thing we try to avoid is value traps. We think by identifying catalysts, which means that the stock is cheap, but there are reasons why it shouldn't be cheap anymore in the near future, is a way for us to try to minimize that as well as it's a way to take a very complex company and boil it down to the two or three things that you really think are going to make the company move from a valuation perspective and then track those things constantly and stay on top of it.

Anu: Yes. No, that all makes sense. Now, of course, every investment thesis has risks to it. In your view, what are the three biggest threats to value investing's long-awaited resurgence, if you will, and how are you seeking to manage those risks in your portfolio?

David: Loaded question. You know that I'm a value manager, so three risks is limiting, knowing that we don't sleep and we're always worried about the risk side of our investments. I would say if I had to keep it to three, I would say that the Fed or the Treasury continue pumping tremendous amounts of liquidity. That liquidity keeps flowing into the S&P or the Mag Seven. On a relative basis, value just does not perform as well.

I think number two, the law of large numbers no longer exists. The big companies just keep getting bigger. Somehow, the bigger base that they're on, they're able to even grow faster than what they've been able to grow so far. The Mag Seven becomes 30%, 35%, 40% of the S&P and they don't look back. That, again, would also be trail for value side of the equation. I think as a derivative of that, valuations no longer matter.

People are just buying the best. They're not worried about what the valuation is of that or what the payback time is or the discounted cash flow that those things no longer matter. Some have told me, one person in particular who is a big influence in my career, the market on a short-term basis is a voting machine. On a long-term basis, it's a scale. The valuations don't matter in the short term because people are just voting.

On a long-term basis, once that scale comes into play, the valuations really make a difference. I would say the last piece is that the innovation that has typically taken place has not always stayed with the same group of companies. There are always other companies shooting for those big guys because that's where the profit pool is. If that profit pool stays with the big guys, that would also be a departure from history.

That would be something that would make this all go the wrong way from a value perspective. I think, how do we manage those risks in the portfolio? Diversification. If you looked at our portfolio today, on the high-end of the range of number of names that we typically own, we're more diversified on a relative basis than some periods of time historically. It's more about making sure you don't have too much exposure to a specific risk and putting the exposure in the portfolio where we have a high conviction.

Anu: Yes, absolutely. David, it's often said that value stocks perform better in rising rate environments and inflationary environments. Do you share that view and what's your macro view at this point?

David: Yes, so rising rates typically just from a discounting mechanism, value stocks are typically thought of as short duration. Growth stocks are typically thought of as long duration. If you have rising rates, in theory, short duration would do better. If I was a fixed-income manager sitting here, I would assume that that's what they would say. If you told me that rates are going up, I'd shorten the duration of my portfolio.

That's where value comes into play. The cash flows are closer at hand. Whereas the growth companies, the cash flows are further off in the future. If rates are going up, that's probably a good thing for value. Do I think rates are going up from here? Two weeks ago, I would've told you yes. We don't think that there are going to be more interest rate cuts this year.

I think with some of the economic data that's come out as well as some of the uncertainty that's been put into the markets because of the back and forth with some of the policy decisions that are being made, we might not be done cutting rates. I think the discount in the futures market just moved up an additional rate cut for the balance of this year. I think our view is we're not done with inflation. There will be more inflation in the future more than what's expected. The Fed is somewhat boxed in in terms of what they can or can't do to be able to execute their dual mandate.

Anu: Those are terrific points. Thank you for sharing those. As we wrap up here, everyone's been waiting for this longer-waited comeback for value over the last number of years. Some people may say, "Is it really going to happen this time?" or, as you said, "Will the big players, the mega-cap names, keep on getting bigger?" What are your final words that you'd like to share with our audience to convince them that this may be that inflection point they've been waiting for?

David: First, I want to thank you for not forgetting about us value managers who, clearly, it's been a long period of time, don't have many friends. We always appreciate getting an invite somewhere. I think this is not an all-or-none decision. I don't think anybody needs to say, "I want to go from the significant overweight I have in growth to a significant overweight in value." I would encourage everybody to look to balance their diversification. In the midst of doing that, know the value that you own.

If you look today at the Morningstar large-cap value universe, there are 300 mutual funds in that universe. 170 of those funds own one or more of the Magnificent Seven. If you're owning value to get Magnificent Seven exposure, I'm not the guy to talk to. If you're owning value to diversify your growth exposure, then just make sure that that's what it's actually doing. As you get more comfortable with that or as you see signs of some of these things playing out, slowly lean into more exposure to value. Value is very hard to catch up with.

Growth companies have this really bright future. If you miss the first 10%, 20%, 30% of the move, it's okay. You can still buy it. Value, you're playing for 50% move or 70% move. If you miss the first 20% or 30%, might not be worth going and chasing. Value is one of those things. You have to be a little bit early. Sometimes being early is being wrong, so you don't want to be too early. I would just say slowly lean into, make sure that your diversification is where it wants to be, and that you own value that you think you own.

Anu: I think that's a great point is don't just look at the headline performance numbers, which might be a little bit misleading given the run of those mega-cap technology companies, but always look under the hood and understand your exposures. David, thank you so much for all of these thoughts. I cannot let you go without a very quick bonus question. You've been at Neuberger Berman for, I believe, over 30 years, which is an incredible tenure. I'm sure over the years, you must have had some important mentors or pivotal experiences. I wanted to ask you, is there a piece of advice that you've received in your career, particularly early on that's really stuck with you?

David: I think what I would say to anybody starting out is if your boss ever comes over to you and puts a stack of books on your desk and says, "Figure this out," don't be discouraged. It's an opportunity. Figure it out. I would also say, don't underestimate what any advisor that you may have or mentor that you may have is willing to do. There's no question, that's a bad question that's out of bounds. Ask. Better to ask and understand than not ask and find out you really didn't know what was going on.

Anu: Thank you. That is very good. I won't ask the specific contents of what I'm sure was a very thick stack of textbooks once many years ago. Today's discussion focused on the evolving landscape for US large-cap value investing. We explored the elevated growth stock valuations, the shifting macroeconomic environment, and how all these things are creating opportunities for value equities.

We also discussed the risks, how to avoid value traps, the macro uncertainties, and how the Magnificent Seven may continue to get market share as well, which is another risk to consider. These are all things that investors need to navigate carefully. As you said, a focus on diversification and really understanding what is under the hood is critical for investors. David, thank you again for being here to share your insights. It's been a pleasure to have you on the show.

David: Thanks for having me.

Anu: To our listeners, if you've enjoyed what you've heard today on Disruptive Forces, you can subscribe to the show from wherever you listen to your podcasts or you can visit our website at nb.com/disruptiveforces, where you can find previous episodes as well as more information about our firm and offerings.