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Charting the Shift in Equity Market Leadership: From Growth to Value

After a decade of outperformance, growth stocks were outpaced by value stocks last year. Andrew Pyne explains why we expect value will continue to lead equity markets for some time to come.

A U.S. economy poised for growth coupled with a 10-year period of significant outperformance by growth stocks creates an environment where value stocks, in our opinion, are likely to thrive in the coming years as they did in 2016.

PIMCO has believed for some time that we are seeing a rotation from growth to value stocks. Results in 2016 bear this out: Value broadly outperformed growth, as shown in the chart, and we believe the value cycle is likely still in its early stages.

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Many value stocks are cyclicals – meaning they tend to perform well when the economy heats up (think of financials, manufacturing and energy, for example) – and plenty of investors expect higher growth, inflation and interest rates under the Trump administration. At PIMCO, we acknowledge there are uncertainties that could affect the macro outlook, but our baseline view for continued above-trend U.S. growth is positive for these cyclical stocks that tend to rise and fall with the U.S. economy.

It’s also important to remember that the stock market tends to go through cycles where either growth or value outperforms – and generally speaking, the higher the pendulum swings one way, the higher it subsequently tends to swing the other way. The reversal that began last year followed ten years of growth outperformance, suggesting we could still be in the early stages of a prolonged upswing for value stocks.

This chart originally appeared in Putting Markets in Perspective – a concise look at PIMCO’s latest thinking on global economic drivers and financial markets.

The Author

Andrew Pyne

Equity Strategist

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