Vanguard perspective

Our outlook for value? Brighter days ahead

May 13, 2021

Are we seeing a reversal of fortune with the value premium asserting itself once again?

1 Value and growth are represented by a market-capitalization-weighted index of companies in the bottom and top thirds of the Russell 1000 Index, sorted by price/book ratios and reconstituted monthly. Data are as of February 28, 2021.

The unprecedented recent outperformance of growth over value
The chart shows the ten-year annualized return of a portfolio that is long value and short growth. The line is above zero, hovering around 5% for from 1936 through 2010 except for a brief dip in the beginning of 2000. Over the last decade, however, the line has been significantly below zero, reaching a low point of negative 6% in August 2020, demonstrating an unprecedented underperformance of value relative to growth.

Secular trends are driving fair values, but the market may have overreacted

Value stock price/book ratio divided by growth stock price/book ratio
This is a line chart with four lines. One line represents the actual value of the of the value to growth price to book ratio, the second line represents estimated fair value of the value to growth price to book ratio, and two more lines represent the error bands (one standard deviation above and one standard deviation below fair value). The value to growth ratio stays within the fair value range for almost the entire period, except for going above it in 1993‒1994 and below it in the bubble of 2000. The ratio then goes below the fair value range again over the past year, reaching its lowest point in August 2020, and moves back up slightly (but still below fair value) over the past few months.

Value signaling a resurgence

The drivers of value outperformance over the next 5- and 10-year periods
There are three side-by-side charts. Each chart shows distributions of projected 5-year and 10-year annualized returns. The first chart shows one source of the projected returns of value—expected changes in the level of fair value. This source of return is modest. The median contribution to return over 5 years is 2.2%, and the median over 10 years is 1.5%.  The second chart shows a second source of projected returns of value—expected reversion to the fair value of value. These estimates are much higher, centering on 9.0% over 5 years and 4.6% over years. The final chart shows the projected annualized total returns of value as the sum of the returns in the first two charts. The median projected total return of value is 11.1% over 5 years and 6.0% over 10 years.

Value versus growth stocks: The coming reversal of fortunes

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