#99 – From Disinflation to Inflation – Value over Growth

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#99 – From Disinflation to Inflation – Value over Growth

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Value over Growth – In this article you’ll find:

  • Value over Growth – Which are the reasons that poised Value to enjoy long-term tailwinds?
  • Value over Growth – How can we try to harness the inflationary environments for taking the right choices?
  • Value over Growth – Why REITs (often seen as a defensive asset during stock market corrections) it’s demonstrating us another history this time.
  • Value over Growth – From disinflation to inflation, what we should know?

Here you can find other articles:

  1. Stock Market Behavior During High Inflation
  2. Vision Of Africa’s Future
  3. Why We Should Be Happy During A Bearish Market?



Value over Growth

JP Morgan Asset Management – Value over Growth

Value has outperformed Growth by a significant margin so far in 2022, leaving many investors guessing whether this resurgence is over or the start of a sustainable trend.
We believe Value is set to enjoy long-term tailwinds for several reasons:

    1. Value’s underperformance over the last decade makes its valuation compelling compared to the broader market, especially when considering its past and future expected earnings growth.

    2. We are in a macroeconomic environment that we haven’t seen in 40 years: persistently high inflation and aggressive monetary tightening. 

    3. Portfolios on average have a large Growth overweight. The start to this volatile year has reminded investors the importance of balance, and flows into Value could be a tailwind.

Value over Growth

Strong earnings potential by value side

A symptom of Growth’s exuberance has been extended valuations. With low rates resulting in inexpensive capital, investors had no problem investing for future returns rather than demanding them today. 

Earnings growth of Growth stocks has outpaced that of their Value counterparts, but investors have more than paid up for it.

Interestingly, earnings growth for Value has still been respectable, yet multiples have not expanded commensurately.

Historic inflationary pressures and a monetary policy shift bode well for Value

Mounting inflationary pressures are prompting the Federal Reserve to take action.

While rising rates tend to get a bad reputation with equities, the reality is there are winners and losers. Longer-duration stocks, highly dependent on cheap and easy capital, feel the brunt of the pain.

However, areas like energy, financials, materials and industrials have typically done well. These sectors make up over 40% of the Russell 1000 Value index, while only a mere 16% of Russell 1000 Growth.

Value over Growth

Wells Fargo – Value over Growth

Adjusting our S&P 500 Index earnings targets – Value over Growth

S&P 500 Index earnings have been more resilient to date than previously forecast.

First-quarter and second-quarter earnings handily beat expectations, and we expect third-quarter earnings to continue that trend, albeit at a slowing pace.

For the full year 2022, we now expect S&P 500 Index EPS of $215, showing modest growth over 2021 EPS of $210.

Given our view that the earnings contraction should largely take place in 2023, we lowered our 2023 EPS estimate to $205.

This reflects our view that earnings may likely peak in 2022 and trough in 2023 as the economy begins to recover later in the year.

What is holding REITs back?

Value over Growth

During past stock market corrections, U.S. investors have often turned to defensive assets such as the U.S. dollar, bonds, and REITs.

The U.S. dollar has performed spectacularly well in 2022, up 17% year-to-date, but this is not the case for bonds and REITs. The Bloomberg U.S. Aggregate Bond Index is down -14.1% on the year, and the NAREIT Index is down -28.5% year-to-date.

REITs are interest-rate-sensitive because they rely heavily on debt to finance projects. As interest rates rise, so does the cost to finance new real estate projects. Customer demand for real estate space can also slow if rates rise too high or too quickly.

Goldman Sachs – Value over Growth

From disinflation to inflation

The modern era of disinflation started in the early 1980s. When Paul Volker became Fed president in the summer of 1979 US inflation was over 11% but, unlike today, US 10 year yields reached nearly 16%.

Restrictive monetary policy designed to reduce inflation by constraining demand heralded a prolonged period of low inflation and strong growth, supported by positive supply side reforms.

Value over Growth

From globalization to regionalization

In some ways the peak in globalisation in relation to World trade coincided with the financial crisis. Since then World trade has slowed and trade share of GDP has also moderated

Value over Growth


Important Considerations – Value over Growth

  • While valuations are important, investors need to ensure they get what they pay for.
  • Over the next 12 months, consensus estimates are calling for stronger earnings from Value sectors such as energy, industrials, materials and parts of consumer discretionary.
  • Value tends to perform well in inflationary environments.
  • In 2023, Wells Fargo believe investors likely will anticipate a late-2023 to 2024 economic recovery, sending price-to-earnings multiples higher even as full-year earnings contract.
  • Significant multiple expansion has been common early in a new cycle as market prices move well ahead of earnings.
  • Real estate investment trusts (REITs) are often viewed as a defensive asset during stock market corrections, but this has not been the case in 2022.
  • REITs are largely struggling with performance because interest rates are rising. Rising interest rates increase the cost of capital for REITs, plus rising bond yields have become attractive alternatives to REIT dividend yields.
  • Investment returns should be weaker in this cycle as higher interest rates imply smaller contributions for valuation.

Value over Growth

  • Goldman Sachs expect a more ‘Fat & Flat’ than a secular bull market with more focus on alpha than beta. Investors are likely to focus more on margins than revenues.
  • Equities performed strongly from the 1980s through to the end of the century and the collapse of the technology bubble.
  • Over the disinflation period annualised returns were in the midteens and the valuation expansion accounted for over half of the returns as interest rates fell and valuations expanded.
  • While the pandemic accelerated a number of trends that were already underway, in particular, the increase in digitialisation, online shopping, remote working and digital payments, the War in Ukraine is accelerating other trends that pre-existed the crisis.

Monetary Policy

Join the conversation with your own take on these topics in the comments below.

About the Author

Alessandro is a Financial Markets enthusiastic and he loves learning from articles/papers on many financial topics.

In doing so he shares with you the most interesting charts and comments.


This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. 

This material has been prepared for informational purposes only. 

Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

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