After Brutal Run Of Underperformance, Is The Value Premium Back?

Key Takeaways

• Value stocks outperformed growth 2021‑2025, especially outside U.S.
• Valuation spread predicts five‑year value premium historically.
• Global value premium since 1926 averages 3.3% annually.
• Fourteen‑year value famine ended, signaling possible new cycle.
• U.S. valuation spread still narrower than Europe and Japan.

Pulse Analysis

The value premium—an excess return earned by buying cheap, fundamentals‑driven stocks—has been a cornerstone of modern portfolio theory since the early 20th century. Yet from 2007 to 2020, value underperformed growth by nearly 6% per year, prompting many managers to tilt heavily toward high‑growth tech names. This prolonged “value famine” eroded confidence in the premium’s reliability, leading to a re‑examination of valuation metrics and a search for new signals that could revive the strategy.

Chingono’s paper tackles the puzzle by linking two robust data sets: the price‑to‑book spread between value and growth stocks, and the forward five‑year value premium for each historical year. By mapping the starting spread to subsequent five‑year returns across the U.S., Europe and Japan, the study uncovers a clear pattern—wider spreads historically precede stronger value performance. The 2021‑2025 window shows the widest spreads in decades, coinciding with a pronounced outperformance of value, particularly in European and Japanese markets where growth valuations remain elevated.

For practitioners, the findings suggest that the current valuation environment may be the first phase of a longer‑lasting value cycle. Asset allocators could consider increasing exposure to undervalued sectors, while remaining mindful of regional nuances; the U.S. spread, though narrowing, still lags its overseas counterparts. However, the premium’s durability hinges on macroeconomic stability and earnings growth for value firms. Investors should monitor spread dynamics and forward‑looking premium estimates to gauge whether the resurgence sustains beyond the next few years.