We believe that cyclical value-growth rotations are rooted in investor behavior and that investors become more price-conscious when profit growth is strong. Since 2008, corporate profit growth has been insufficient to sustain value stocks.
As inflation normalizes, we expect it to eventually exceed the Federal Reserve's target. Improved performance from the energy, materials, and financial sectors may be signaling a resurgence in these beaten-down value-oriented segments. However, the ultimate driver of the predicted rotation to value stocks is apt to be a change in investors' appetite for risk.
Our research found that deviations from fair value and future relative returns share an inverse and statistically significant relationship over the next 5- and 10-year periods. The relationship is an affirmation that, ultimately, valuations matter—that the price we pay influences our return.