A common belief is that “value” or cyclical companies tend to fall the most during economic recessions. This is because these businesses—often found in sectors like energy, financials and materials—are more closely tied to economic activity. When growth slows, demand for their products and services typically weakens.

While this makes intuitive sense, investment returns are influenced by more than just how company profits behave during a downturn. Share prices are also affected by how expensive or cheap stocks are to begin with (starting valuations), and how those prices adjust as conditions change.

Even if value companies experience larger falls in earnings during a recession, their overall returns may not be significantly worse if they start from lower prices. In some cases, cheaper starting valuations can help limit downside when markets reprice risk.

It’s also important to note that different parts of the share market do not respond to economic stress in a consistent or predictable way. The sensitivity of sectors and factors to market movements changes over time, which means it is too simplistic to assume that value stocks are always riskier than growth or technology stocks during recessions.

This leads to a key question: do value stocks actually underperform the broader share market during recessions?

To explore this, we look at how value stocks and the overall market have behaved across past recession periods. Total returns are broken into their key components—earnings changes, dividends (embedded in fundamentals), and P/E (valuations) multiple changes—using a standard Bogle-style framework: 

Total Return ≈ dividend yield + earnings growth ± change in valuation

• income from dividends
• changes in company earnings
• changes in how much investors are willing to pay for those earnings (valuations)

This approach helps separate losses caused by weaker company performance from losses caused by investors paying less for future earnings. It allows us to see whether value stocks perform better because their earnings hold up (which is unlikely given their economic sensitivity), or because they start from lower prices, which can reduce how far valuations fall in a downturn.

This question is relevant today because broad equity indices remain at historically high valuations, driven by heavy concentration in large growth and technology stocks. Despite often being viewed as structurally defensives, they have behaved more like high beta assets (highly sensitive), showing sharp swings in response to changes in rates and risk sentiment. At the same time, more cyclical and value-oriented indices, typically seen as more economically sensitive, have in some cases shown comparable or lower volatility, supported by cheaper starting valuations, see below the correlation with market.

Source: Bloomberg, Innova Asset Management

What the historical data shows is that value company earnings typically fall more during recessions, as expected. However, total returns for value stocks have often ended up being very similar to those of the broader market.

The main reason is how valuations adjust. Value stocks, which start from lower prices, tend to experience less severe valuation declines. In contrast, the broader market—particularly expensive growth stocks—often sees sharper falls in valuations as expectations are reset. As a result, the overall market can decline just as much as value stocks, even if earnings hold up better.

For investors, this highlights the importance of diversification and valuation discipline. Value stocks may suffer more during downturns in terms of earnings, but historically this has often been offset over time by valuation adjustments.

Source: Research Affiliates

Looking at the market today

This is important for today’s context, where the gap between growth and value valuations remains wide. In the event of an economic shock, traditionally perceived “blue-chip” or growth stocks could experience larger price falls than more cyclical sectors such as energy or materials—even if cyclical earnings decline more.

Whilst nothing is certain, as it depends on the cause of the shock and the type of recession, by tilting your portfolio away from growth and expensive tech (especially in the US), you are putting historical pattens and probability on your side. 

When growth stocks become very expensive like they are today, future returns can suffer. Even if the companies keep growing their profits, their share prices can fall simply because they were priced too high to begin with. This is called ‘mean reversion’ – valuations eventually move back toward more normal levels. When that happens, growth-focused markets can experience sharp falls, even if the company earnings hold up reasonably well.

Periods such as the early-2000s technology downturn (Tech Wreck) show how valuation declines can drive large market losses, even when company fundamentals remain relatively resilient.

Source: Bloomberg, Innova Asset Management

Valuation differences were extremely wide during the technology bubble—and a similar degree of dispersion exists in today’s market.

Source: Bloomberg, Innova Asset Management

Conclusion

Many investors worry that value stocks will crash harder in a recession, but that risk depends on starting valuations. Historically, there is no strong evidence that value stocks consistently underperform during recessions – as we can see toward the end of the tech wreck crisis in 2001, value actually held up compared to the market. Value and growth stocks are similarly likely to disappoint when the economy slows, but when growth stocks disappoint, they are punished more severely because their higher prices depend on strong future growth assumptions. While value may be slightly more cyclical (tends to move with the market), its low expectations and cheap valuations have historically more than offset any additional earnings weakness.  For this reason, fears of recession alone have not been a strong reason to avoid value investments.