ClearBridge Investments believes positive forces from One Big Beautiful Bill Act passage and future interest rate cuts should soon outweigh negative forces of tariff actions.

Higher interest rates and greater fiscal spending is good for value but is being largely ignored due to the focus on a soft landing.

Key Takeaways

• This new market cycle of higher interest rates and greater fiscal spending is unequivocally good for value but is being largely ignored due to the focus on AI and an economic soft landing.

• We believe the market’s attention on large growth stocks has created an attractive value menu, particularly in energy, insurance and IT hardware manufacturers.

• The relative value of value versus growth is back to all-time highs, suggesting value stocks will have an edge over the cycle and making an investment case for a healthy value allocation.

The value of value relative to growth is back to historic highs, being driven by the extreme concentration of the top seven stocks in the S&P 500 Index. The combination of expanding equity multiples and higher interest rates in 2023 has overshadowed growing risks and created an environment reminiscent of 1987’s “Black Monday”. Value provides investors strong advantages in the face of these growing extremes, offering the potential for downside protection against market declines as well as compelling relative return potential on a decrease in market concentration.

Key Takeaways

• We are in the early stages of a new market cycle characterized by higher volatility, inflation and interest rates and
  creating conditions where value stocks thrive.
• New market cycles are characterized by future leaders beginning extremely cheap, and valuation spreads remain at historic highs despite two years of strong performance.
• As investors recognize there is no return to the pre-COVID growth cycle, value stocks will shift toward historically normalized levels, creating compelling opportunities for investors.

Market cycle arcs persist until completed, and there is still a long way to go in favor of value.

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