By Michael Allison, CFA
This week’s Chart compares the performance of growth versus value stocks across the U.S., Eurozone, and U.K., as represented by their respective MSCI indices. From December 2023 through December 2024, we see U.S. growth stocks leaving their value counterparts and the broader Eurozone and U.K. indices in the dust. The gap widens dramatically in late 2024, and U.S. growth stocks significantly outperformed their value and non-U.S. peers over the year.
Now, let’s zoom out a bit and talk about what this means for investors. The dominance of U.S. growth stocks (think tech behemoths and innovation-driven companies) isn’t exactly breaking news—they’ve been leading the charge for years. But this week’s Chart tells a subtle and interesting story. U.S. growth stocks are on fire and their valuations are stretched. Meanwhile, non-U.S. value stocks (particularly in the U.K. and Europe) are flatlining, which might look boring but screams “opportunity” if you’re hunting for relative bargains.
Why Consider Decreasing U.S. Growth Stock Exposure?
Let’s start with the elephant in the room: valuation. U.S. growth stocks are trading at high multiples. Their forward P/E ratio stands at 22.3, placing it in the 95th percentile of historical valuations. History tells us these names can be vulnerable in environments of rising interest rates or slowing economic growth. If those tailwinds (e.g., low rates, massive liquidity) reverse, the downside risk is significant.
Additionally, concentration risk is real. The U.S. equity market is heavily dominated by a handful of mega-cap growth names—Apple, Microsoft, NVIDIA, etc. Diversifying into areas where valuations are more reasonable (read: non-U.S. markets) could be a smart move, potentially reducing overall portfolio risk.
The Case for Non-U.S. Value Stocks
Non-U.S. value stocks, particularly in Europe and the U.K., are trading at deep discounts compared to their U.S. growth counterparts. They’re also heavily weighted toward sectors like financials, energy, and industrials—sectors that tend to shine in periods of rising interest rates, higher inflation, or economic recovery.
Moreover, currency dynamics could work in U.S. investors’ favor. The dollar has been exceedingly strong, but if it starts to weaken, investments by U.S. investors in foreign markets could get a nice currency tailwind, boosting returns.
Growth vs. Value in a Global Context
This isn’t just about geography. It’s about style diversification. For portfolios heavily tilted toward U.S. growth due to relative outperformance, they are likely overexposed to a narrow slice of the market. Allocating more to international value stocks can balance that out, providing exposure to sectors and geographies that might thrive in the next market cycle.
To summarize: By reducing exposure to frothy growth stocks and reallocating to non-U.S. value stocks, investors can hedge against concentration risk, benefit from attractive valuations, and position their portfolios for a changing market environment.
Sources:
• MSCI
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