Why Value, and Why Now?

Key Takeaways

The market is shifting after two years of dominance by the Magnificent Seven, technology stocks fueled by enthusiasm for artificial intelligence (AI). This rotation may favor value stocks.

The Trump administration’s aggressive tariff policy led to a significant decline in stock prices in April, causing the S&P 500^® Index to fall into correction territory after a prolonged bull market. This downturn occurred during a period of increased market volatility driven by uncertainty surrounding policy and concerns about substantial investments in AI.

This year, through April 30, the Russell 1000 Value Index has outperformed the Russell 1000 Growth Index. We believe investors can navigate today’s choppy market by maintaining and potentially increasing exposure to value stocks.

Why Value Stocks Are Gaining Attention in 2025

1. Attractive Valuations

Value stocks have largely underperformed growth stocks since the Great Financial Crisis. As shown in Figure 1 Panel A, the duration and degree of value underperformance are significant, particularly during 2023-2024. This has created a disparity in valuations between value and growth that hasn’t been seen since the late 1990s and early 2000s tech bubble.

As Figure 1 Panel B shows, there’s still a wide gap in valuations between growth and value stocks. For investors whose equity portfolios have grown overweight in growth stocks, this has created a potentially attractive entry point to rebalance by increasing their value holdings.

The valuation gap between value and growth has grown to near 20-year highs, although the spread narrowed somewhat in April as investors fled to value stocks during the market sell-off triggered by Trump’s tariff policies.

We believe valuations, coupled with risk aversion due to the uncertainty and volatility of the current environment, are a potential catalyst for value to come back in favor.

Valuation alone isn’t the only factor we consider when making investment decisions. We go deeper to find companies that we think are high quality because they have historically generated higher and more stable returns on capital, have lower levels of leverage and possess durable business models.

We favor these high-quality companies because they have tended to be less susceptible to market fluctuations, particularly during volatile periods like the current economic environment.

2. Dividend Contributions

As Figure 2 shows, dividends have represented 31% of S&P 500^® Index total returns over the last 80 years.

During decades of lower price returns, such as the inflation-soaked 1970s when interest rates surged or the early 2000s after the tech bubble burst, dividends helped offset weakness and manage risk when price returns were stagnant or negative. As the chart illustrates, dividends made up most or all of the market’s returns during these periods.

During periods of market turbulence, when price appreciation is in question, dividends may offer investors a potential return on their investment. Value stocks have tended to be a more significant source of dividends than their growth counterparts.

Continued uncertainty about the path of inflation and the Federal Reserve’s decision-making on interest rates could result in a higher cost of capital. This, along with already high valuations, could diminish future price returns. As a result, we believe sustainable dividend income may be vital in the effort to achieving consistent returns.

3. Defense Wins Championships

Downside protection can help manage risk and build wealth over time, particularly during periods of market upheaval.

Consider the unforgiving nature of investment losses: A 10% loss requires an 11% gain to break even, and a 50% loss requires a 100% gain to break even. See Figure 3. Given the performance required to overcome a significant loss, we think limiting these losses in the first place is sensible.

As value investors, we tend to find stocks in sectors like consumer staples and utilities that have offered downside protection and dividends during volatile and recessionary periods. While companies in these sectors may not be flashy, many offer stable business models and are less sensitive to economic fluctuations. And they’re often cheap. As Figure 4 shows, low-beta stocks, or stocks that don’t move much or differ from broader stock market movements, are trading at a discount.

Given the elevated risks in today’s market, we find these characteristics attractive. Interest rates, inflation, tariffs and increasing caution about investments in AI represent several risks investors face.

After an extended bull market, investors and economists are worrying about the possibility of a recession. We believe defensive holdings and lower volatility will likely be critical to navigating this challenging environment.

4. History and Academic Research

Nobel Prize-winning research from Eugene Fama and Kenneth French proved that value stocks have historically outperformed and created more wealth over time than growth stocks. Additionally, academic research shows that quality securities outperformed the market over time. We find the combination of quality and value to be remarkably powerful.¹

For nearly 30 years, even including the decade of growth’s dominance, high-quality value has been the style with the highest returns and the lowest risk, as Figure 5 shows.

Empirical evidence shows that quality has been one of the best-performing factors in growth and value during recessions and stagflation.

Why Value Stocks Are Crucial During Market Volatility

Value stocks have played second fiddle to growth stocks for the last two years, so recent investor skepticism of the asset class is understandable. However, if investors think about the optimism of the stock market coming into 2025 and the volatility that has transpired due to unforeseen events, a diversified portfolio that considers value stocks could offset some of the effects of market turbulence.