The recent DFA meeting shed light on an important market narrative—one that often gets misinterpreted. While growth stocks have had a tremendous run, the real story is not about value underperforming. Instead, it is about growth pushing valuations to historically high levels.

Historical Valuations Tell the Real Story

Looking at long-term data, the historical valuation for equities has hovered around 16x earnings over the last two decades. This consistency suggests that value stocks have not struggled—growth has simply outpaced expectations. The two standout periods where valuations expanded beyond the norm? The late 1990s and today.

This raises an important question: Are growth stocks fundamentally stronger, or are we witnessing another period of unsustainable expansion?

A Similar Story in International vs. Domestic Markets

A similar trend emerges when comparing U.S. and international markets. Over the past 10 years, international markets have averaged a 14x earnings valuation—a stable, long-term metric. Meanwhile, the U.S. market has expanded far beyond that. The common assumption is that international markets have lagged. But in reality, it is U.S. growth stocks, driven largely by tech, that have pushed domestic valuations to extremes.

The Tech Factor: Driving U.S. Outperformance

The real driver of U.S. market expansion? Technology stocks. The outsized returns from mega-cap tech companies have skewed overall market performance. Strip those away, and international markets remain a critical piece of a well-diversified portfolio.

What This Means for Investors

• Valuations Matter. Growth stocks have outperformed, but history suggests they will not keep outpacing value indefinitely.
• International Diversification Still Matters. The U.S. has led due to tech, but a globally diversified approach remains prudent.
• Sustainability is Key. Markets tend to revert to historical norms. When valuations get stretched, prudent investors should consider rebalancing strategies.

Bottom Line

The dominance of U.S. growth stocks, particularly in tech, has overshadowed long-term valuation norms. But that does not mean value is weak or international markets are failing. It means we are in an unusual cycle—and cycles always correct. Smart investors understand that market leadership shifts over time, making diversification and valuation discipline more important than ever.

File # 4346664