This time last year, it looked as if value was making a comeback after several years of underperformance. From January to mid-September 2016, the iShares Russell 1000 Value Index outperformed its growth counterpart by 3% and went on to finish the year nearly 10% higher. Unfortunately, this year the index has struggled to hold on to its gains. Year-to-date the value index has underperformed growth by nearly 15% as the so-called FANG stocks have surpassed all expectations. However, according to a new research report from analysts at Jefferies, there are underlying signs that growth outperformance may be built on shaky foundations as Growth Revisions are signaling a warning sign .

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Growth Revisions Show Growth Stocks' Weakness

The problem with relying on indexes to judge the performance of value/growth is that you get, what Bob Pisani of CNBC has called "bleed" because "the parameters of what constitutes value and growth are a bit fuzzy, you can (and do) get stocks that have characteristics of both, so they are usually included in both indices."

To get around the bleeding problem, Jefferies' analysts took the S&P 1500 and sorted it into deciles on a sector-neutral basis in two ways: the cheapest P/B and the highest EPS growth expectations. Looking at EPS revisions over the past two years, the team found:

"Value revisions have been flattish while growth revisions are modestly negative and have been getting worse for two quarters now, with revisions in negative territory and the value minus growth revisions gap at the widest level in six quarters."

Considering the YTD performance of growth, this is something to keep an eye on especially when the growth trade is crowded, and momentum traders have swamped the style.

Value minus growth revisions are at the highest level in six quarters.  It’s been perilous for those who have tried to call the turn here, but with some value names performing strongly, FANG flattening, revisions presumably driving performance of some value retailers, it’s worth monitoring.  Would seem like growth isn’t as unassailable as some believe.

Interestingly, one of the sectors that has seen the greatest volume of upward growth revisions is retail (more positive than negative revisions for the first time in 11 quarters) as Wall Street analysts back away from their worst-case scenario (Amazon's world domination) forecasts.

Growth Revisions