As Growth Stocks Struggle in a Downward Trend, Value Stocks Outperform

U.S. value stocks have recently been outperforming growth equities, and this trend is expected to persist, according to a report from Sevens Report Research. The outperformance, which is supported by technical analysis, suggests that value stocks may continue to lead over growth stocks in the near future.

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On Monday, the Vanguard Value ETF (VTV) showed a strong performance, rising by 1.1%, bringing its total gain for the current quarter to 5.5%, according to FactSet data. By comparison, the Vanguard Growth ETF (VUG), which focuses on growth stocks, has declined by 3.6% during the same period, even after gaining 1.2% on Monday. This significant contrast highlights the recent strength of value stocks over their growth counterparts.

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According to Tyler Richey, a chartered market technician at Sevens Report, value stocks outperformed growth by two percentage points during the U.S. stock market's downturn last week. He noted that while value stocks remain near their all-time highs, growth stocks are experiencing a downward trend. Despite the broader market slump, value equities have managed to maintain their resilience, while growth equities have seen a more pronounced decline.

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The past week saw both value and growth ETFs experience declines. Shares of the Vanguard Value ETF, which tracks large-cap value stocks in the U.S., dropped 3.1%, while the Vanguard Growth ETF, which tracks large-cap growth stocks, fell by a more significant 5.1%, according to FactSet data.

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Richey commented on this movement, stating, “Stocks rolled over hard to start September last week.” However, he noted that the trend of value stocks outperforming growth stocks, which began to emerge during the market rebound in August, has remained intact. He highlighted the technical weakness in growth stocks, saying that the Vanguard Growth ETF is showing a "deteriorating technical backdrop," while the Vanguard Value ETF, although weakened, still holds a more resilient technical position.

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Despite the recent underperformance of growth stocks, growth equities still hold an edge over value stocks when considering performance throughout 2024. As of Monday, the Vanguard Growth ETF has risen by 16% this year, surpassing the 13.2% gain of the Vanguard Value ETF during the same period, according to FactSet data.

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Small-cap stocks, as measured by the Russell 2000 index, have underperformed compared to U.S. large-cap stocks in 2024. However, within the small-cap universe, value stocks have outperformed growth stocks in the third quarter.

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The Russell 2000 Value index (RUJ), which tracks small-cap value stocks, has gained 4% in the third quarter, pushing its year-to-date rise to 1.9%. In contrast, the Russell 2000 Growth index (RUO), which tracks small-cap growth stocks, has risen by just 1% during the third quarter. However, on a year-to-date basis, small-cap growth stocks have gained 5.1%, outpacing the performance of small-cap value stocks.

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In a move that highlights the growing interest in small-cap value stocks, Rob Arnott’s Research Affiliates is launching a new ETF focused on this segment. Set to begin trading on Tuesday under the ticker symbol NIXT, the Research Affiliates Deletions ETF targets small-cap value stocks that have been removed from market-capitalization-weighted indexes. This approach aims to capitalize on the undervalued potential of these stocks, positioning the ETF to benefit from overlooked opportunities in the small-cap space.

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This ETF launch reflects the broader interest in value investing, especially in segments of the market where stocks may be undervalued or underappreciated. Arnott’s focus on small-cap value stocks aligns with the recent trends seen in the market, where value has been outperforming growth in the small-cap category.

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The U.S. stock market rebounded sharply on Monday, with major indexes such as the Dow Jones Industrial Average (DJIA), S&P 500 (SPX), and the Nasdaq Composite (COMP) all gaining 1.2%, according to FactSet data. The Russell 2000 (RUT), which focuses on smaller companies, saw a more modest rise of 0.3% during the session.

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Despite the broader market rebound, Richey believes that value stocks will continue to outperform growth stocks in the second half of 2024. He pointed to technical and trend analysis, which suggest that the current setup for value stocks remains favorable.

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The recent outperformance of value stocks over growth stocks appears to be a continuing trend, supported by technical indicators and market sentiment. While growth stocks have led the way for much of 2024, value equities have shown greater resilience in recent weeks, particularly during market downturns. As investors navigate the second half of the year, value stocks may continue to benefit from this favorable setup, both in large-cap and small-cap segments. With new ETFs like the Research Affiliates Deletions ETF targeting undervalued stocks, the emphasis on value investing may further grow, offering opportunities for those looking to capitalize on the trend.

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