Finding attractively valued stocks that can overcome evolving conditions requires a new mindset.
Market uncertainty often creates classic value-investing controversies. This year, sweeping US policy change has shaken the macroeconomic outlook and raised hurdles for many companies. So how can value investors find stocks with recovery potential when it’s hard to predict the next disruptive shock?
The hunt for value isn’t easy these days. While the S&P 500 touched record highs in August, investors remain fearful about the impact of tariffs on economic growth and corporate earnings. Extreme volatility in early 2025 highlighted the extraordinarily fragile market sentiment.
Navigating a Year of Acute Controversy
This environment has all the hallmarks of a value opportunity. Traditional value opportunities are formed when a stock trades below its intrinsic value, often because investors lose confidence in its business prospects because of a controversy. When markets overreact to troubles in a company or industry, it frequently sets the stage for a potential recovery.
Investors understandably have real anxiety about how businesses will manage through changing trade and macro conditions. Yet some companies are better equipped to cope than perceived.
Recognize What Is Researchable
Policy uncertainty is making the investing challenges of 2025 particularly testing. So what can equity investors do?
The first step is to identify what can be researched—and what cannot. It’s ineffective to try and predict what tariff levels will ultimately be imposed on different countries or products. Similarly, efforts to forecast inflation, interest rates and GDP growth trends in such a fluid environment won’t help us find companies that can surmount new challenges. Instead, we believe investors should focus on company-specific issues that are researchable—regardless of the policy clouds—such as:
- Companies undergoing positive change: Share prices may fall hard when a company falls on hard times. But businesses that change for the better often aren’t recognized until their stock catches up.
- Sustainable competitive advantages are always a good driver of earnings growth that can withstand near-term challenges.
- Strong or improving industry dynamics: Think about the healthcare industry, which faces severe policy uncertainty. However, the pace of long-term R&D spending is still likely to remain above GDP growth. That means select healthcare companies can buck the negativity over the long term. Agriculture equipment is another industry with subpar earnings growth, though its long-term productivity enhancements should fuel industry growth that is poised to outpace GDP growth.
A New Value Universe
Companies like these can be found in surprising places. In 2000, financials accounted for nearly a third of the Russell 1000 Value Index, followed by healthcare, communication services and the more cyclically sensitive consumer discretionary sector. Technology stocks comprised only 4% of the value index. Nearly a quarter-century later, the weight of financials has decreased, while investors can find a larger cohort of industrials and technology stocks in the value mix (Display).
