Looking forward to the U.S. stock market outlook, will value stocks eventually return?

With U.S. stocks hitting record highs, some investors are betting that future gains in U.S. stocks will be increasingly driven by some recent undervalued value stocks.

In fact, value stocks have fallen more than the broader market since the coronavirus-induced sell-off. Meanwhile, value stocks have also been lagging in the stock market's strong rebound from March lows.

Typically, value stocks are spread across business-cycle-sensitive sectors, and given the current state of affairs - the largest global recession since the Great Depression, value stocks will perform especially bleak.

However, some investors believe that if the U.S. economic recovery gains momentum in the future, investors' attention will shift from the big tech stocks that led the market during the Covid-19 pandemic to the relatively cheap value stocks, including energy companies, banks and industrials Enterprise groups, will quickly become the bellwether leading the market up.

The Russell 1000 Value index trades at nearly 18 times earnings, up from 14 a year ago, and has risen about 45% since the end of March. By contrast, the Russell 1000 Growth index's price-to-earnings ratio has risen from 22 to 31, a gain of more than 70% over the same period.

Nicholas Colas, co-founder of DataTrek Research, said: “The movement of cyclicals and value stocks is an important part of validating the market rally. Ultimately, I think value stocks will win, but it will be very short-lived. ."

Fed Chairman Jerome Powell on Thursday unveiled a sweeping policy revision to focus more on tackling unemployment than controlling inflation, reviving hopes of an economic recovery. Shares of banks including Wells Fargo and Citigroup were higher on Thursday.

In the coming week, investors will pay close attention to the U.S. non-farm payrolls data released next Friday to find out whether there is an improvement in the fundamentals of the U.S. economic recovery.

In addition, signs of progress in the development of a Covid-19 vaccine have fueled debate about a recovery in value. Some investors believe that could hasten the reopening of U.S. businesses.

US President Trump said a new coronavirus vaccine may be available before the Nov. 3 presidential election, earlier than most experts expected, including one including Goldman Sachs (207.71, -2.44, -1.16%). Some analysts believe a vaccine could be approved as early as the end of this year.

Goldman analysts said earlier this month that could put the S&P 500 on track to as high as 3,700 by the end of the year and spur a rally in value stocks, especially if news about a vaccine continues to be encouraging. The index has hovered around 3,500 recently.

However, many market participants are skeptical that value stocks will recover anytime soon.

Value industries such as retail have struggled for years with dismal earnings or business models. These ancient value industries are being disrupted in a shift to a more tech-driven world, a process that has accelerated during the COVID-19 pandemic.

"Valuation alone doesn't drive stock prices, it has to be a combination of valuation and fundamental improvement," said Richard Bernstein, chief investment officer and chief investment officer at Richard Bernstein Advisors in New York.

"For value stocks to outperform, profit growth typically needs to accelerate. That hasn't happened yet," he added.

In each of the past 14 recessions, value stocks have led the way, according to BofA Global Research. However, the bank also warned of a "value trap". The so-called value trap refers to stocks that should not be bought even if they are cheap, because their deteriorating fundamentals will make stocks more expensive instead of cheaper.

Such stocks have underperformed the broader market by 4 percentage points each year since 1997, the bank said. Bank of America's (26.3, 0.25, 0.96%) model sees energy and brick-and-mortar retail as industries with value traps.

Kim Forrest, chief investment officer at Bokeh Capital Partners, believes that the recovery in value may be a thing of the past.

Technology has changed the way companies handle inventory, she said, and altered the business cycle, undermining the benefits cyclical companies get from growth.

"Some dinosaurs didn't realize the comet hit, and the (investment) environment has changed," Forrest said.

There is still hope, including Bill Smead of Smead Capital Management.

In a note to investors, Smeder said an eventual rise in inflation could boost shares of energy companies, banks and home builders, which tend to do better when consumer prices are higher.

Still, even long-term value bulls like Smed will have their perseverance tested.

"We are patient, but that patience will not last forever," he wrote.