Abstract
Value stocks endured a period of severe underperformance until recently. We show that the value spreads between valuations of value stocks and their most expensive peers expanded in all regions and sectors during this period of underperformance, reaching the same extreme high levels last seen at the peak of the tech bubble in 2000. Investors have re-rated expensive stocks relative to their value peers reflecting an expanding difference in their respective earnings growth forecasts. There are signs this trend may now have changed. Value spreads may have started a new period of compression at the end of 2020, a trend led by shrinking differences in earnings growth forecasts. A compression in value spreads would be favorable for value stocks, smaller capitalization stocks and for multi-factor strategies.
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