Stocks Analysis by Michael Lebowitz covering: iShares S&P Small-Cap 600 Value ETF, iShares S&P 500 Growth ETF. Read Michael Lebowitz's latest article on Investing.com
The graph below, making the rounds on social media, serves as evidence from many market pundits that the significant outperformance of large-cap growth stocks versus small-cap value stocks is due for an imminent reversal. While their predictions may prove correct, it is a grossly flawed argument if it’s based on the graph.
Each sector and its underlying companies have different earnings growth profiles. The technology sector tends to exhibit the highest earnings growth. Financials, utilities, and real estate often have more reliable but slower growth rates.
The final graph using cumulative income growth puts the price ratio into a more realistic perspective. What’s not debatable is that a meaningful analysis of the price ratio of two stocks should not be based solely on prices.The analysis above uses two companies. Over time, Microsoft’s earnings will slow, and it will no longer be considered a growth stock. At some point, the earnings growth of Microsoft and Robert Half may converge, and the fair value of the two may be much closer to a flat line.
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