Relative Performance Apex

An interesting study from Morningstar shows that the relative outperformance of large “growth” stocks versus large “value” stocks may have reached an important apex in May of this year. The analysis goes back to 1937 and shows that the two other times in which this relative performance reached such an extreme were November of 1939 and February of 2000. Following both of these previous apexes, growth stocks underperformed value stocks for many years. “Growth” stocks are perceived to have above average earnings growth while “value” stocks have below average valuations. The study could be implying that it may be time to reduce portfolio weightings in large cap growth stocks and invest more in quality companies with lower valuations. Reasons for this possible flip in relative performance could be perceived risk of rising interest rates or tax rates which could cause the market to favor companies with stronger free cash flow and that are less reliant on outside capital.