08 Jul COTW: Investors Paying a Record Premium for Growth over Value Stocks
Growth stocks are currently trading at more than twice the price per dollar of expected earnings than their value peers. In the chart below, growth and value stocks are represented by the Standard & Poor’s 500 Pure Growth and Pure Value Indexes, respectively. S&P measures growth stocks using three factors: sales growth, the ratio of earnings change to price, and momentum with growth stocks having higher sales growth, higher earnings change to price and greater momentum. Conversely, value stocks have lower sales growth, lower earnings change to price and less momentum. While it should be expected that companies with higher sales and earnings growth will trade at higher valuations, all else equal, the current valuation spread of 11x is substantially higher than the long-term average of 4.2x.
The chart below can be downloaded here.
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