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Barron's Value Stocks Are Ready for a Comeback Against the Magnificent Seven

Value stocks have lagged behind as gains in the Magnificent Seven tech stocks have pushed the S&P 500 to near record levels, but they should catch up soon. 

Companies such as Nvidia, Microsoft, Meta Platforms, and have roared ahead in response to expectations that the rise of artificial intelligence will gain steam over the coming years. That would mean not just red-hot demand for Nvidia’s graphics processing units, but benefit much of the rest of the tech sector. Analysts have raised their forecasts for 2024 earnings since the start of the year, giving the rally yet more fuel.

The Magnificent Seven are collectively worth trillions of dollars, comprising a large portion of the S&P 500, so their gains are fueling a broader rally. The S&P 500 is up almost 8% this year.

Value stocks just haven’t been able to keep pace. Those companies are further along in their life cycles and have seen the fastest growth they’re likely going to see, so investors aren’t willing to pay as much for the earnings they will pump out in the near term. Profits are often more influenced by changes in demand across the economy, rather than by company-specific developments.

The Vanguard S&P 500 Value exchange-traded fund is up about 4.1% for the year. 

That isn’t a terrible performance at all, but it can improve versus growth stocks for some time. A record amount of money has already flowed into tech stocks this year, and there is a limit to how much investors will allocate toward the sector.

Any waning of interest in growth names could translate into superior performance for value. The economy is also continuing to grow, which usually means rising sales and profits for value names. 

The strength of the economy is also why long-term Treasury bond yields have risen in the past few months, a move that often correlates with value stocks outperforming growth. Higher yields usually indicate a strengthening economy, with better profits for value stocks.

An additional factor that could help value gain ground versus growth is that higher yields reduce the current discounted value of future profits. Growth companies are valued on the basis that much of their cash flow will arrive years in the future, so higher yields are a negative for their prices.

A stronger performance for value names may not even require much of a push. It’s likely that investors could start taking profits in Magnificent Seven by selling them and taking a chance on value, a dynamic that has played out historically.