Are Value Stocks Cheap For A Fundamental Reason?

AQR

Cliff Asness

Research

8 Pages

AQR Capital Management examines whether value stocks are cheap due to genuinely weaker fundamentals or simply mispricing driven by investor expectations. The paper argues the current value spread sits above the 90th percentile historically, yet implied growth expectations for expensive stocks appear unrealistically high, challenging the idea that value’s discount is justified.

Key Takeaways

Extreme Valuation Spread: Value spreads rank above the 90th percentile globally, historically linked to higher subsequent returns rather than deteriorating fundamentals for cheap stocks.
Implied Growth Gap: Markets imply expensive stocks will outgrow value by ~80–120 percentage points over 5 years, versus analyst forecasts closer to 20–40 percentage points.
Predictive Power Strong: From 1950–2020, the value spread showed a 0.89 correlation with future value premiums, suggesting valuation gaps carry meaningful forward return information.
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