Time to consider value?

If the economy reaccelerates and the Federal Reserve (Fed) continues its interest rate-cutting cycle — as markets currently expect — value stocks may be poised for a resurgence. While rate cuts have historically broadly supported stocks, their impact on value versus growth can vary depending on the macroeconomic backdrop.

Why value may be well positioned

Lower interest rates mean businesses can borrow at a lower cost and invest in growth more easily. This usually gives growth companies an advantage because their future earnings can look more certain. In the current rate cycle, however, interest rates are higher, which may benefit value stocks. Plus, they’re currently at attractive entry points because many are still trading at discounts to historical valuations. Value stocks, based on the Russell 1000 Value Index, are at a 30% discount to the S&P 500 Index, and a 50% discount to growth stocks, based on the Russell 1000 Growth Index. (See chart below)

The stock market is also broadening beyond mega-cap technology stocks, potentially giving value sectors like energy, industrials, financials, and healthcare room to outperform. Value stocks are also a way to help reduce exposure to concentrated growth or AI-centric risks. Also, companies with strong balance sheets, consistent earnings, and tangible cash flows can be better positioned to weather macro uncertainty and capitalize on reaccelerating demand. 

Contrarian value philosophy

We don’t look at the investing world as value or growth stocks, but cheap or expensive stocks. That framing aligns with our contrarian value philosophy. We believe it’s more accurate to think of the stock market as a price-setting mechanism driven by the most optimistic participants, not necessarily long-term fundamentals.

Market’s price-setting mechanism

Stock prices aren’t determined by consensus. They’re set by the most motivated buyer — the investor willing to pay the highest price at the moment. Buyers and sellers submit bids and asks. The bid price is the maximum a buyer is willing to pay, and the ask is the minimum a seller is willing to accept. A transaction occurs when the most aggressive buyer meets the most willing seller. That’s how the market works. So the price reflects the optimism at the time. It’s not a balanced view of the intrinsic value of the stock. That’s based on the company's fundamentals like cash flow, assets, and growth potential, which are independent of its current market price. In other words, stock prices often reflect the views of a small, bullish minority rather than the broader investor base. So, the cautious, valuation-conscious majority typically has little influence on short-term pricing.

Visualizing market price vs. intrinsic value

Short-term stock prices can fluctuate wildly, while intrinsic value can evolve steadily. To illustrate this dynamic, consider the hypothetical chart below. It shows market price, which is volatile, sentiment-driven, and reactive to short-term events, and the intrinsic value, which is smooth, gradual, and grounded in fundamentals.

What this may mean for value-focused investors

Here are four things for value investors to keep in mind:

1. Stay grounded in fundamentals. Short-term prices may not reflect the intrinsic value of a stock. That’s OK — your strategy should be built for long-term results. By focusing on any disconnects between price and value, investors can avoid chasing sentiment and build portfolios grounded in fundamentals.
2. Use volatility as an opportunity. When prices disconnect from fundamentals, disciplined investors may be able to buy quality companies at attractive valuations. When price-setters lose confidence, prices can fall sharply, revealing an “air pocket” between price and value. In a downturn, even high-quality or growth names can become undervalued, offering long-term potential upside.
3. Understand price formation. Remember that market prices are driven by the most optimistic participants — not by consensus.
4. Avoid chasing the price-setters. Stick to your process. The market’s price may not be a reflection of true value.

Bottom line

The stock market is a price-setting mechanism driven by optimism. For contrarian value-focused investors, this reinforces the importance of discipline, patience, and a long-term view. Understanding how prices are formed — and how they diverge from fundamentals — can help investors stay the course and potentially capitalize on mispricing.