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Business News/ Markets / The Stocks That AI Mania Left Behind
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The Stocks That AI Mania Left Behind

wsj

Value stocks looked like they were making a comeback—until AI madness happened.

The growth index trades at about 32 times trailing earnings, while the value index trades at about 14 times earnings, excluding the results from loss-making companies.Premium
The growth index trades at about 32 times trailing earnings, while the value index trades at about 14 times earnings, excluding the results from loss-making companies.

This was supposed to be the year value stocks shined. Then AI mania took over and ran away with the spotlight.

Shares of big tech companies are surging this year and racing past value stocks once again, powered by investor optimism about the promise of artificial intelligence. That is a reversal from last year, when value stocks pulled ahead of growth stocks for the first time since 2016.

The Russell 3000 Value Index has returned just 2.1% this year through Monday, lagging behind the Russell 3000 Growth Index by 31 percentage points. That is the second-biggest underperformance on record dating back to 2000, according to Dow Jones Market Data.

It has become a familiar refrain for investors: The value index has topped growth just nine times in 23 years.

“For investors, there is this muscle memory" for buying tech stocks, said Liz Young, head of investment strategy at SoFi. “We go back to the tried-and-true story."

This year, large companies in both indexes explain the gap. The 10 biggest companies in the Russell growth index have gained an average of 82% this year. Chip maker Nvidia has more than tripled, while Meta Platforms is up about 180%. Other stars of the index include Apple, Amazon.com and drugmaker Eli Lilly.

On the value side, six of the 10 largest stocks are down this year: Chevron is down nearly 20% after falling oil prices punished big energy stocks. Johnson & Johnson, Merck & Co. and Bank of America are also in the red.

Growth-stock companies typically promise to deliver faster-than-average earnings growth in the future. Value stocks, by contrast, boost profits more slowly and are considered a bargain because they trade at a low multiple of their book value. They tend to be concentrated in established sectors such as financials, consumer staples and utilities.

In recent years, ultralow interest rates encouraged investors to chase higher yields from growth stocks, which consistently outperformed value stocks. Last year marked a departure from the trend: the Fed’s rapid rate increases and recession worries pummeled shares of big tech companies. Value stocks also fell, but far less severely.

With rates remaining high this year, some analysts thought value stocks would continue to outperform growth stocks. Then tech stocks surged after OpenAI’s ChatGPT chatbot became a viral sensation.

Value stocks, meanwhile, were hit by the regional banking crisis earlier this year that sent financial shares plunging. Other value-oriented sectors like utilities and healthcare have badly lagged.

The outlook brightened further for growth stocks this month, when the Fed signaled it might be done raising rates for the year. Inflation data soon after gave investors hope that the central bank is managing to cool the economy without tipping into a recession. Now some are betting the Fed could start cutting rates as soon as March.

The growth index trades at about 32 times trailing earnings, while the value index trades at about 14 times earnings, excluding the results from loss-making companies.

The outlook for both types of companies is upbeat. Overall, the S&P 500’s growth companies are expected to increase per-share earnings by 14.3% next year, according to data from CFRA, while value shares are expected to boost profits by 11.4%.

It is why some investors are still betting on value. All told, they have poured $17 billion into actively managed exchange-traded funds focused on value shares this year, according to LSEG data. Inflows into similar growth-oriented funds total $6.8 billion.

Others expect the promise of growth stocks to keep drawing investors. Ken Mahoney, CEO of Mahoney Asset Management, said investors might feel pressured to turn to them if they are lagging behind the index at the end of the year.

“Performance anxiety is a real thing," he said.

Further reading:

The Case for Investing in Value StocksValue Stocks May Have Done a Lot Better Than You Think

Write to Charley Grant at charles.grant@wsj.com

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