As individual investors and their financial advisors assess the major stock indices some 100 days into the new Biden administration, the armchair takeaway is that the great bull market of the last 10 years—driven by growth stocks—continues to party hearty. But compelling data strongly suggests that advisors should, in fact, be telling their clients not to succumb to the status quo of the last decade—namely, investing in growth stocks.

Evidence suggests that we are in the early stages of what is likely to be a powerful and enduring period of outperformance for value stocks over both the growth cohort and the broader market.

As always, price matters, and the mantra of value investors is to buy companies that are priced significantly below their earnings potential. The logic underpinning the prospect of a new value cycle is rather intuitive and not a trick question: Which of these companies would you rather buy today? A Russell 1000 Growth constituent with expected EPS growth of 17 percent and P/E of 27x, or a deep value company with expected EPS growth of 23 percent and P/E of 11x?

2020’s fourth quarter value rally was decidedly strong, and after a decade characterized as mostly pro-growth, it can easily be dismissed as an anomaly. But now, after two consecutive quarters of outperformance in which value generated nearly 40 percentage points of excess returns, it’s no longer a question of whether a new value cycle has begun, but rather, how long will it last?

A number of unambiguous factors suggest that this value cycle is likely to be long and enduring, including:

• The starting point for value is particularly attractive given its valuation relative to the overall market.

• The brevity of the current value rally compared to past value cycles.

• Strong projected earnings growth for value stocks.

• Significant opportunity for re-rating as investor sentiment continues to improve.

The seeds of the value recovery took root in 2020. The COVID-19-driven lockdowns had an unprecedented impact on the global economy and investors took aim at cyclical stocks, most notably in energy, financials and travel-related businesses. The carnage, however, created a once-in-a-generation opportunity to buy market-leading franchises with strong balance sheets and ample liquidity to survive the severe—but temporary—disruption. Amid the extreme volatility and market chaos, stock selection was crucial as many companies faced an uncertain future and precarious financial situations. For a disciplined value investor, this was an opportunity to deploy capital to well-positioned companies that had been valued as if the pandemic would never end.

Attentive and forward-thinking management teams did not sit still during the downturn. Rather, they cut costs and restructured operations to an extent that may not have been possible absent such an acute crisis. As a result, the aggregate earnings recovery is likely to be swift and powerful. Cyclical companies, whose earnings were most impacted by the lockdown, should see the strongest subsequent growth as revenues recover and operating margins expand with expenses largely held in check.

Additionally, unlike other cyclical downturns, many businesses are emerging from this recession with depleted inventories. A combination of inventory re-stocking and investments to reconfigure supply chains—to make them more resilient to economic shocks and trade politics—should provide an even greater surge in both the top-lines and bottom-lines than in a standard recovery.

The current value rally began as in past cycles, and sentiment improved dramatically over a fairly short time period. The relatively modest outperformance of value compared to past value cycles, along with the extreme depth of the previous anti-value cycle, portends a strong recovery. Although these recoveries can be bumpy as uncertainties are resolved, the evidence indicates we are in the early stages of what may be a powerful period of value outperformance.

Asset management has been defined as the practice of taking imperfect and incomplete information about the present and using it to make projections about the future. While it can seem an impossible task, history shows that there are some long-run truths that can be relied upon. Among them, the long-term success of disciplined value investing.

Richard S. Pzena is founder and co-chief investment officer of Pzena Investment Management in New York City.