Value Stocks Hit 15-Month Low Against Growth As AI Fuels Tech's Vengeance Over 2022's Rate-Hike-Induced Market Fall

Value stocks fell to a fifteen-month low in relation to growth stocks, and are already lagging by more than 20% year to date on the heels of an AI-related rally propelling equities in the technology sector. 

On Thursday, the ratio between the iShares Russell 1000 Value ETF (ARCA: IWD) and the iShares Russell 1000 Growth ETF (ARCA: IWF) fell to levels not seen since end-January 2022, thus illustrating a widening underperformance of value-oriented companies relative to growth ones.

The gauge that measures the relative strength of value against growth stocks climbed as high as 33% in 2022, as the Fed's aggressive rate hikes triggered massive selloffs in growth-tech shares, while the value segment of the market was bolstered by the stellar performance of energy stocks.

Although value stocks have lost virtually all of their relative gains made in 2022, they remain substantially cheap versus growth in the long run, with the IWD/IWF ratio still trading more than 60% lower than its September 2008 highs, when Lehman Brothers failed.

Chart: Value Smashed Growth In 2022, But Gave Back Gains In 2023

Chart: Value Is Still Over 60% Cheaper Than Growth Since 2007

What Explains the Performance This Year? 

• Losses in the Energy Select Sector SPDR Fund (ARCA: XLE), Utilities Select Sector SPDR Fund (ARCA: XLU), Financial Select Sector SPDR Fund (ARCA: XLF) and Real Estate Select Sector SPDR Fund (ARCA: XLRE) have weighed down the value-invested ETF. 

• The value is also sharply underweighted in technology, consumer discretionary and communication services. The Technology Select Sector SPDR Fund (ARCA: XLK), Consumer Discretionary Select Sector SPDR Fund (ARCA: XLY), and Communication Services Select Sector SPDR Fund (ARCA: XLC) have contributed the majority of the success in the growth-related ETF.

• Stock-wise, growth was pushed up by Apple Inc (NASDAQ: AAPL), which added alone 3.9 percentage points to the ETF's performance year to date; Microsoft Corp. (NASDAQ: MSFT) added 3.8ppt; NVIDIA Corp. (NASDAQ: NVDA) added 2.7ppt; and Alphabet Inc. (NASDAQ: GOOG) (NASDAQ: GOOGL) added 2ppt. Therefore, the strong rally in AI-related stocks sharply favored the growth universe of the market. 

• Meta Platforms Inc (NASDAQ: META) was the main stock contributor for the value ETF in 2023, but despite an impressive 110% return this year, it only provided 1.3ppt to the IWD's performance due to its modest 2.5% weight in the portfolio.

• Pfizer, Inc. (NYSE: PFE), Johnson & Johnson (NYSE: JNJ), Chevron Corporation (NYSE: CVX) and Bank of America Corp. (NYSE: BAC) have been the main negative contributors to the performance of value in 2023.  

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