Is the Value Factor Dead? Evidence After 2007

The value factor—buying low price-to-earnings or price-to-book stocks—has badly lagged growth stocks since 2007, sparking fears that the premium has died. Competing explanations include structural change (intangibles favor growth), crowding (too many algorithms chase value), and normal cyclicality. Evidence suggests value is real but cyclical, with periods of brutal drawdown followed by recovery.

The historical value premium

For nearly a century, value stocks—those trading at low ratios of price-to-earnings (P/E), price-to-book (P/B), or price-to-sales (P/S)—have delivered higher returns than the broader market, especially over long periods (10+ years). This is the value factor or value anomaly.

From 1926 to 2006, research by Fama, French, and others documented that a portfolio of high–book-to-price stocks (equivalently, low P/B stocks) outperformed low–book-to-price stocks by roughly 3–5% annually. This premium appeared consistent across markets, time periods, and company sizes. It became a pillar of academic finance and the basis for factor investing.

The premium made intuitive sense: investors overpay for exciting growth stories and underpay for boring, cheap businesses. Value investors who buy these depressed assets and hold patiently should be rewarded. Value was not luck; it was a rational risk premium.

Then 2007 arrived.

The value drought: 2007–2020

From 2007 to 2020 (and continuing into the early 2020s), value stocks severely underperformed growth stocks. The cumulative underperformance was staggering.

A simple illustration:

• In 2007, a basket of the cheapest 20% of S&P 500 stocks traded at an average P/E of 12x earnings.
• A basket of the most expensive 20% traded at 25x.
• By 2021, the split had widened to 15x for value and 35x+ for growth—values had cheapened modestly while growth had inflated further.

Over the entire 2010–2020 period, growth stocks outperformed value by 8–10% annually on average. For a 60-year data run, this is an extreme reversal. Hedge funds and quant funds that had bet on value factor long positions suffered massive losses. Academic papers written confidently about value began to feel quaint.

The underperformance was sharpest in the 2010s, especially post-2015, as mega-cap tech companies (Apple, Microsoft, Google, Amazon, Facebook—all expensive, all growing) dominated markets and index returns. Value funds that held cheaper industrial and financial stocks got left behind.

Structural explanation: the intangibles thesis

One leading explanation is structural change. The historical value premium was built on a world where earnings were highly visible and tangible assets—plants, inventory, real estate—drove returns.

Today, the most valuable companies are technology and intellectual-property-intensive firms where earnings are hard to predict and tangible book value means little. Amazon, for instance, trades at high multiples not because investors are irrational but because its true assets—code, cloud infrastructure, logistics networks, customer data—do not appear on the balance sheet at full value. Traditional book value is nearly meaningless.

Value screens based on low P/B or low P/S ratios will systematically exclude these firms and overweight old-economy companies with high tangible assets but declining competitive advantages. A steel mill with low P/B is not a bargain; it is a decaying asset.

If this thesis is correct, the value premium has not just been dormant—it has been structurally impaired. The accounting framework on which value investing rests no longer captures the source of economic value. The premium would not return; it would be partially replaced by factors that better capture intangible value (such as earnings quality or return on equity).

Crowding explanation: too many robots hunting the same prey

A second explanation is crowding. As factor investing and algorithmic trading have exploded in scale, massive capital has flowed into value factor positions. When everyone adopts the same strategy, the expected return shrinks because the edge is competed away.

Value factors—especially simple ones (low P/E, low P/B)—are easy to identify, cheap to implement, and well-documented. Institutional investors, quant funds, and retail traders all pile into the same trades simultaneously. This drives prices up—the very stocks that were cheap become expensive (relative to their fundamentals) because so much capital is chasing them.

For crowding to persist, new capital must keep arriving. If crowding-driven flows reverse—if value funds shrink or investors rotate to other factors—value stocks could cheaply again suddenly and outperform sharply.

Consistent with this view, value has shown brief periods of violent rebounds (e.g., early 2022, when growth faltered and value surged), suggesting that crowding and flows matter.

Cyclicality explanation: value is just in a deep trough

A third view is that value is cyclical. The premium ebbs and flows based on economic conditions, sentiment, and market regimes. The 2010–2020 period was unusual but not unprecedented; similar droughts occurred in the late 1990s (the dot-com bubble era, when value badly lagged growth).

Under this view, value is not dead—it is temporarily out of favor. When the market cycle turns, growth becomes expensive, earnings growth slows, and investors return to rewarding balance-sheet strength and cash generation. History will ultimately favor value over a long horizon.

This view is supported by mean reversion: the valuation multiples of value and growth stocks eventually align after extended divergence. But “eventually” can mean a decade.

Where is the data pointing?

Empirically, the situation remains contested:

Against value being permanently dead:

• Value had significant positive returns in 2022, 2023, and early 2024 as growth faltered and interest rates rose, suggesting cyclicality.
• Even in the worst periods (2010–2020), value did not produce negative real returns; it just lagged dramatically.
• Over very long horizons (30+ years), value still shows a modest premium, though it has eroded.

Supporting structural change:

• Value premiums have shrunk across all major markets (US, Europe, developed Asia), not just in the US, though the US pattern is most extreme.
• Intangible-adjusted return on equity does favor growth-tilted companies over traditional cheap stocks.
• Younger companies and those with higher R&D expenses (typically excluded from traditional value screens) have outperformed.

Supporting crowding:

• Value factor volatility and drawdowns have increased, consistent with herding behavior.
• Factor correlation has risen, suggesting reduced diversification (a symptom of crowding).
• Detailed studies of fund flows show value inflows during upswings and outflows during downswings, amplifying reversals.

The consensus among academics is cautious: value is likely real and cyclical but is facing genuine headwinds from structural change in the economy. Neither “value is dead” nor “value is fine” is quite right. Value premiums are lower and more volatile than historical norms, and intangible-adjusted measures may be more reliable than raw P/E screens.

Implications for practitioners

For investors considering value tilts, the post-2007 experience suggests:

• Simple P/E or P/B screens may be outdated. Intangible factors (like quality, profitability, or earnings quality) often do better.
• Diversification within the factor is important. Value as a monolith is riskier than holding a mix of value and other factors.
• Patience is required. Even if value is cyclical, the cycle is longer than typical market cycles. A 10+ year underperformance period is plausible.
• Crowding can be real. Extremely cheap factors that have attracted trillions may offer less upside than less-crowded opportunities.

The value factor is wounded but likely not dead. But it no longer offers a “free lunch” as it appeared to in historical data, and a purely mechanical approach to value selection is increasingly risky.

See also