Global value stocks have continued to underperform in 2019. But there’s a big disconnect between the weak returns of cheaper stocks and their underlying earnings profile.

Investors in value stocks have continued to be disappointed this year. In the first four months of the year, the stocks in the cheapest group in the market have underperformed growth stocks by a wide margin, following the trend in recent years. Hopes of a turnaround have not materialized.

Earnings Growth Looks Resilient

But there are some underlying signals that deserve attention. Based on price/forward earnings, the MSCI World Value Index trades at a 39% discount to the MSCI World Growth Index (Display, green line). That’s well below the long-term average discount of value to growth stocks.

Maybe value stocks are cheap for a reason? Perhaps their fundamentals have deteriorated to justify the slump? Not so. In fact, value stocks’ earnings growth expectations are very much in line with the long-term trend at 4.6% below those of growth stocks (Display, blue line). The disconnect between valuations and earnings has widened sharply since late 2016. And the trend is widespread across sectors.