Stability Over Cyclicals in Value’s Next Inning

Stability Over Cyclicals in Value’s Next Inning

Time to read: Minutes
James Dorment

James Dorment, CFA

Co-Head of Large Cap Fundamental Research, Head of Value, and Portfolio Manager

William Theriault

William Theriault, CFA

Senior Client Portfolio Manager

The prospect of rising real interest rates favors value versus growth stocks, while moderating economic growth and persistent inflation favor inexpensive stability value names over well-priced cyclicals.

Ample runway for further value outperformance

After a long run for growth-oriented companies, value names have outperformed more recently. We polled our LinkedIn audience to find out which investing style—growth or value—they think will outperform in 2022. The majority favored value, and we tend to agree with them. From our perspective, we expect value can and likely will outperform for the foreseeable future.

Measuring the performance disparity of growth and value, growth’s dominance more or less peaked in the last year. Although the initial sharp move toward mean reversion has already taken place, the disparity between growth and value is still wide compared with levels from 2017 and 2018, suggesting that markets are still solidly in the middle innings of value outperformance. Consider that the last major divergence, which occurred in the late 1990s, was followed by a sustained period of value dominance (Fig. 1).

Figure 1: The post-dot-com era saw a multi-year value rally
Relative rolling 3-year total return, Russell 1000 Value Index minus Russell 1000 Growth Index
Figure 1: The post-dot-com era saw a multi-year value rally

As of April 30, 2022. Source: Morningstar, Voya Investment Management. Past performance is no guarantee of future results.

Rising real rates could offer fertile ground for value investing

The recent outperformance of growth over value was really turbocharged starting with the Federal Reserve’s signal in December 2018 that it would stop raising rates, which drove real interest rates into negative territory. This year, the Fed is starting out on a path of multiple potential interest rate increases. Against this backdrop, markets are in the process of unwinding growth’s outperformance.

From 2010 to 2018, a period marked by tepid global growth, the average of real interest rates in the U.S. was about 50 bps. We see no reason why real rates couldn’t get back to or even exceed these levels given the generally stronger global economic outlook and moderating but structurally higher inflation. Should real rates reach this level, we believe it could be good for value stocks and somewhat less positive for growth stocks.

Looking to value names rooted in stability, not cyclicality

The more recent phase of value’s outperformance has been led largely by cyclical forces (Fig. 2). Companies have been leveraging improved revenue growth on the heels of the pandemic recovery, driving positive revisions and multiple expansion. This has resulted in a revaluation of sorts for many cyclical names.

We think the complexion of what is undervalued has changed, becoming more rooted in stability than cyclicality. These are companies that have been somewhat ignored as investors spent the past two years wrestling with questions of “transitory versus persistent inflation” and “reopening versus lockdown.”

Figure 2: Stable value leadership appears poised to continue
U.S. equity performance year to date, by factor
Figure 2: Stable value leadership appears poised to continue

As of April 30, 2022. Source: Morningstar, Voya Investment Management. Past performance is no guarantee of future results. Performance based on the Axioma U.S. Universe. Size has been inverted to show small minus large and the effect of smaller size.


  • Valuation premiums for growth versus value remain above their historical average. Rising real rates should continue to be a headwind for growth and positive for value.
  • However, as economic growth likely moderates from the currently unsustainably high levels, and more persistent inflation likely pinches margins, these could prove to be headwinds for currently well-priced cyclicals.
  • We believe this would really set the stage for inexpensive stability and quality to drive value outperformance going forward.

Past performance does not guarantee future results. This commentary has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities. The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Fund holdings are fluid and are subject to daily change based on market conditions and other factors.

The distribution in the United Kingdom of this presentation and any other marketing materials relating to portfolio management services of the investment vehicle is being addressed to, or directed at, only the following persons: (i) persons having professional experience in matters relating to investments, who are “Investment Professionals” as defined in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Financial Promotion Order”); (ii) persons falling within any of the categories of persons described in Article 49 (“High net worth companies, unincorporated associations etc.”) of the Financial Promotion Order; and (iii) any other person to whom it may otherwise lawfully be distributed in accordance with the Financial Promotion Order. The investment opportunities described in this presentation are available only to such persons; persons of any other description in the United Kingdom should not act or rely on the information in this presentation. The Capital Markets Authority and all other Regulatory Bodies in Kuwait assume no responsibility whatsoever for the contents of this presentation and do not approve the contents thereof or verify their validity and accuracy.

The Capital Markets Authority and all other Regulatory Bodies in Kuwait assume no responsibility whatsoever for any damages that may result from relying on the contents of this presentation either wholly or partially. It is recommended to seek the advice of an Investment Advisor. Voya Investment Management does not carry on a business in a regulated activity in Hong Kong and is not licensed by the Securities and Futures Commission. This insight is issued for information purposes only. It is not to be construed as an offer or solicitation for the purchase or sale of any financial instruments. It has not been reviewed by the Securities and Futures Commission. Voya Investment Management accepts no liability whatsoever for any direct, indirect or consequential loss arising from or in connection with any use of, or reliance on, this insight which does not have any regard to the particular needs of any person. Voya Investment Management takes no responsibility whatsoever for any use, reliance or reference by persons other than the intended recipient of this insight. Any prices referred to herein are indicative only and dependent upon market conditions. Past performance is not indicative of future results. Unless otherwise specified, investments are not bank deposits or other obligations of a bank, and the repayment of principal is not insured or guaranteed. They are subject to investment risks, including the possibility that the value of any investment (and income derived thereof (if any)) can increase, decrease or in some cases, be entirely lost and investors may not get back the amount originally invested. The contents of this insight have not been reviewed by any regulatory authority in the countries in which it is distributed. The opinions and views herein do not take into account your individual circumstances, objectives, or needs and are not intended to be recommendations of particular financial instruments or strategies to you. This insight does not identify all the risks (direct or indirect) or other considerations which might be material to you when entering any financial transaction. You are advised to exercise caution in relation to any information in this document. If you are in doubt about any of the contents of this insight, you should seek independent professional advice.

Voya Investment Management is a non-Canadian company. We are not registered as a dealer or adviser under Canadian securities legislation. We operate in the Provinces of Nova Scotia, Ontario and Manitoba based on the international adviser registration exemption provided in National Instrument 31-103. As such, investors will have more limited rights and recourse than if the investment manager were registered under applicable Canadian securities laws.