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Written by David Randall
NEW YORK (Reuters) – As enthusiasm for artificial intelligence sweeps Wall Street, some investors are looking for bargains in more traditional areas of the stock market.
Value stocks, typically defined as companies that trade at a discount based on metrics such as book value or price-to-earnings ratios, have been largely left behind by the adoption of AI by their growth-focused peers.
But gains in some high-value sectors, such as industrials and materials, have accelerated recently. Supporters believe this is a sign that the benchmark S&P 500’s gains are extending beyond a small number of tech and growth stocks.
“It’s clear that there is room to invest in value stocks for the long term,” said Que Nguyen, chief investment officer of equities at Research Affiliates. “These companies remain very cheap, and many have already gone through the difficult process of restructuring their operations and balance sheets.”
The S&P 500 rose 7.7% in 2024, hitting an all-time high. The S&P 500 Value Index is up 3.3% year-to-date, lagging the S&P 500 Growth Index’s 11.6% gain. But some value-focused sectors have boomed in recent weeks.
The S&P 500 industrial sector rose 7.1% last month, led by gains in General Electric and Howmett Aerospace. The composite index rose 5.8% during this period.
The materials sector rose 6.7% in February, led by Vulcan Materials and Ecolab. Consumer staples, home to recent gainers such as Chipotle Mexican Grill and Ralph Lauren, rose nearly 9%.
One of the big draws is that value stocks are relatively cheap compared to the rest of the market. The Healthcare sector is trading at 18.9 times forward earnings, and Energy is trading at 12.2 times forward earnings, well above the S&P 500’s forward earnings of 20.8 times, after the rally pushed the benchmark 42% from its October 2022 low. low.
Michael Hunstad, deputy chief investment officer and head of global equities at Northern Trust Asset Management, believes in the S&P 500 and the so-called “Magnificent Seven” group of growth and tech stocks that have led its rise. We believe that the multiple has risen too rapidly for the company. He said Tesla’s nearly 20% decline this year shows how quickly these stocks can reverse.
“We expect further downside risk for the multiple, especially within the Mag 7,” said Hunstad, who has increased positions in value-heavy sectors such as health care and energy.
Hunstad also believes that value stocks are better able to weather rising interest rates over the long term than growth stocks because their cash flows are short-term and less sensitive to borrowing costs.
Investors still expect the Fed to cut rates before the end of the year, but how quickly and significantly the Fed will cut rates remains uncertain, as easing monetary policy too soon could mean a stronger-than-expected economy could reignite inflation. Expectations about this are declining.
Federal Reserve Chairman Jerome Powell’s testimony to Congress next week could clarify policymakers’ views. Investors are also awaiting next Friday’s US jobs report.
Betting on growth stocks has been risky over the past decade, as stocks of companies like Apple, Google parent Alphabet and Metaplatform soared and led the market rally. The S&P 500 Value Index is up about 110% over the past decade, while the S&P 500 Growth Index is up about 235%.
Broad sentiment about values has weakened on several measures. A net 13% of fund managers surveyed by BofA Global Research expect growth stocks to outperform value stocks over the next 12 months, the highest confidence level since May 2020.
Still, some strategists argue that the productivity gains promised by AI could lift all boats in the long run, benefiting value stocks as well as growth stocks.
Robert Robotti, chief investment officer at Robotti & Company, believes value stocks are most likely to see the most efficiencies, margin expansion and valuation boosts from the introduction of AI. As a result, he increased his holdings in industrial and health care stocks.
“The application of AI will be company-wide, and not just limited to the people who sell chips,” Robotti said. “Those who buy the chips and increase efficiency benefit.”
(Reporting by David Randall; Editing by Ira Iosebashvili and David Gregorio)
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