Tobias Carlisle: The Jaws Will Close Between Growth & Value

In a recent interview with Excess Returns, portfolio manager and author Tobias Carlisle offered a sobering assessment of current market valuations. By examining a composite of historical measures, he presented a clear and stark conclusion: “If you take all of those measures together and you take an average of those measures, it says that the market’s never been as expensive as it is now. And that includes 2000 and 1929 and 2020, which are like record levels of overvaluation.” This extreme valuation has a direct, though not always dramatic, implication for forward-looking returns. As Carlisle explains, “You got an overvalued index. What’s that mean? Means returns in the future are lower. It doesn’t necessarily predict a crash, although when you have valuations like this there has tended to be more market volatility and a reversion to the mean.” This environment creates a challenging landscape for investors, who must decide how to allocate capital when the broad market appears stretched. Carlisle points to the late 1990s dot-com bubble and the Nifty Fifty era as historical precedents. In those periods, excellent businesses saw their stock prices stagnate for years as they worked off excessive valuations. He believes we are in a similar scenario now, where the dominant market leaders may continue to be fantastic companies but their equity returns could be muted for a long time. The natural question, then, becomes where an investor should turn. The answer, according to Carlisle, lies in the areas of the market that have been left behind. “The same thing happened in the late 1990s. Index got extremely expensive, was concentrated in a pocket of very large growthy companies… at the same time you had massive value underperformance, smalls underperformed, international underperformed.” He advises against exiting equities entirely, instead suggesting a contrarian redirection. “Don’t pull out of the market completely. Just redirect where your attention is to things that have, you know, be a contrarian.” This leads to Carlisle’s most contentious belief, one he admits the majority of his peers would disagree with. He focuses on the historic valuation gap between growth and value indices, which is wider today than even in 2000. Many argue this chasm is permanent due to index composition issues, but Carlisle firmly believes in a powerful reversion. “I think that those jaws will close and at some point value will trade at a premium to growth.” He concedes that such an outcome may not make immediate sense, but attributes it to the mysterious, self-reinforcing nature of market cycles, where sentiment can swing violently from one extreme to the other. You can find the entire interview here: