History bodes ill for growth stocks after big 2023 rally
Lower valuations and higher dividend yields mean value stocks typically outperform in the long run regardless of interest rates
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ONE of the big surprises of 2023 was the resurgence of US growth stocks. The tech-heavy S&P 500 Growth Index outpaced its counterpart Value Index by 7.82 percentage points last year, including dividends, after trailing it badly in 2022. That’s not supposed to happen during a surge in interest rates.
At least not according to a popular theory that rising rates are bad for stocks – and particularly bad for growth stocks. The idea is that stock prices reflect the present value of future earnings, a calculation that relies in part on interest rates to discount future earnings to the present. As the maths go, the higher the interest rate, the lower the present value of future earnings, and vice versa.
If that’s true, then growth stocks have more to lose from higher rates than value ones because more of their earnings are expected in the future. Things played out very differently last year, which raises the question: Was growth’s outperformance in the face of rising rates an exception to an otherwise reliable rule?
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