“In the short run, the market is a voting machine but in the long run, it is a weighing machine,” said Benjamin Graham, Warren Buffett’s mentor. Stock prices move on sentiment in the short term but on “weight” or earnings in the long term. The decade-long outperformance of U.S. growth vs. U.S. value illustrates the “weighing machine” in action.*
Growth Has "Weighed" More than Value
• The annual EPS growth of the Russell 1000 Growth Index (6.3%) has exceeded that of the Russell 1000 Value Index (2.6%) over the p ast decade.
• Those nearly four percentage points of outperformance are mirrored by the 11.6% return of the Russell 1000 Growth Index beating the 7.9% return of the R ussell 1000 Value Index over these same 10 years ended February 28, 2018. Stock prices may have fluctuated in the short term due to investor reactions to news and corporate announcements, but long-term performance resembles earnings growth.
• The underlying fundamentals of U.S. growth companies continue to be strong, as evidenced by the estimated sales growth of the Russell 1000 Growth Index (8%) nearly doubling that of the R ussell 1000 Value Index (4%) over the ne xt two years.2 This may bode well for the longer term performance of growth equities.
* As demonstrated by the Russell 1000 Growth Index and the Russell 1000 Value Index.
** Sales growth represents consensus estimates from FactSet and actual future sales growth rates might be materially different from the forecasts referenced.