Value vs. growth valuations blow out in 2020

The divide between value and growth stocks has widened dramatically during the current downturn. Forward price-to-earnings ratios of the Russell 1000 Growth index and its value counterpart are at near 20% premiums and discounts, respectively, to the broad-market Russell 1000 index. Forward price-to-earnings ratios measure the relative valuation of a stock compared with consensus earnings estimates over the next 12 months.

As of early Friday morning, the forward P/E estimate for the Russell 1000 index was about 23.4 times earnings, while that of the growth index was 27.8 times and 19.2 times for the value index, implying that growth stocks are relatively expensive, and value is cheap. What makes this situation odd is that value is expected to outperform in downturns while growth turns lower. So far in 2020, the Russell 1000 Growth index has outperformed the Russell 1000 Value index by almost 22%.

Growth's 2020 record has been significantly boosted by having such companies as Microsoft (+14.8%), Amazon (+29.3%), and Netflix (+36.6%) in its corner.

Comparatively, markets behaved more in line with traditional logic during the global financial crisis with value trading at higher multiples compared with growth throughout the darkest days of the recession. Additionally, multiples of the growth and value indexes moved in a far smaller range of the broad index during the period.