Markets brief: US value stocks have suffered in 2023 but are showing signs of recovery

After lagging far behind the growth stock rally through the first half of the year, value stocks have recovered some ground in recent months. However, they broadly remain left in the dust by growth stocks after the so-called “Magnificent Seven” rally.

But since June, growth stocks have lost ground, while value stocks have overall been flat. The Morningstar US Value Index is down just 0.3% for the second half of the year through Aug. 22, and the Morningstar US Growth Index is down 3.1%. That’s a shift from the first half of the year, when growth stocks gained roughly 28% and the value index rose just 4%. Leaders of this recent recovery include Amgen AMGN and Berkshire Hathaway BRK.B.

The largest value stocks have led the style box for the year’s second half. The Morningstar Large Value Index gained 0.3% while every other corner of the style box fell into negative territory except for large blend stocks, up 0.1% as a group.

After gaining over 30% in the first half of the year, the US Large Growth Index has lost traction. The group lost 2.2% for the second half through Aug. 22, dragged down by heavyweight Apple AAPL (down 8.5% for July and August) and Fortinet FTNT (which lost 22.8%).

Which value stocks have led since June?

Among value stocks, names from the financial services, healthcare, energy, and technology sectors have led gains for the second half of the year so far. At the industry level, general drug manufacturers and diversified insurance companies have been the leading contributors. Oil and gas exploration and production companies such as EOG Resources EOG positively impacted the index’s overall gains.

Pharmaceutical giant AbbVie ABBV has been the number-one contributor to the Morningstar Value Index since June, up 11.2% for the period. Morningstar analysts now see the narrow-moat stock as overvalued.

Multinational biopharmaceutical company Amgen AMGN has made the second-largest contribution (up 17% for the period and now in fairly valued territory), followed by heavyweight financial services conglomerate Berkshire Hathaway (which rose 2.8% since June).

Growth stock vs. value stock performance history

Looking back over the past 12 months, value and growth stocks have ended up in roughly the same spot. The US Growth Index rose 5.3% for the period, while the US Value Index gained 5.2%. That’s largely because during the 2022 bear market, growth stocks had their worst calendar year in decades while value stocks stayed flat.

In the longer term, growth stocks have mostly dominated. Over the three-year trailing period, value stocks have also seen a 14% average annual return, far ahead of the 3.3% average annual return for growth-oriented names. During this period, small-value stocks led the Morningstar Style Box with an average annual return of 18.1%. Small growth fared the worst, with an average annual loss of 1.2%.

But for the five- and 10-year periods, growth stocks have held onto the performance advantage that dominated the market prior to 2022. The US Growth Index rose 10.5% over the last five years through Aug. 22, 2023, while the value index is up 7.1% per year. Over the last 10 years, the growth index is up 13.4% while the value index is up just 9.2% through Aug. 22, 2023.