Unpacking the U.S. dollar’s correlation with value and growth equity style rotations
U.S. large-cap value equities outperformed their growth counterparts in the first quarter as the U.S. dollar weakened, extending a historical correlation that’s seen the value style tend to outperform when the dollar declines. With tariff tensions likely to persist, could that dynamic continue to play out in the rest of 2025?
The fallout from a risk-off Q1 2025
The first quarter was challenging for U.S. equity investors, as the S&P 500 Index fell by nearly 4.3%—its worst quarterly result since the third quarter of 2022.1 In terms of equity style, however, there was a positive outcome for value stocks, as the Russell 1000 Value Index climbed 2.1%, far ahead of the –10.0% result for its style counterpart, the Russell 1000 Growth Index.1 It was the best relative quarterly performance for large-cap value versus growth since the first quarter of 2001.1
The broader market started 2025 on a positive note, lifting the S&P 500 to a record high on February 19. But momentum shifted quickly, and risk-off sentiment drove the markets lower from late February into early April amid rising economic anxiety and tariff risks. Uncertainty surrounding the Trump administration’s intended tariff and trade policies left investors to speculate which countries and products would be targeted and at what levels. From our perspective, the consensus opinion of economists appears to be that higher tariffs will impede global trade and undermine GDP growth for the affected countries, creating the potential for slower growth, higher inflation, increased unemployment, and a greater risk of recession in 2025.
The correlation between the U.S. dollar and the value equity style
For value equity investors, one key input to watch in coming months is how the U.S. dollar reacts as threats of higher tariffs persist. While it’s hard to predict the dollar’s direction as well as the outcome of trade conflicts, we believe that there could be a positive story for the value equity style relative to growth if recent dollar weakness continues and past historical patterns play out again.
As for recent history, the Bloomberg U.S. Dollar Index fell by about 5.1% from a recent peak on January 13 through April 3, reflecting a weakening of the dollar relative to other major currencies.1 Over that same stretch, the Russell 1000 Value Index outperformed the Russell 1000 Growth Index by 10.9% on a total return basis.1
Looking back further, we’ve seen a fairly consistent correlation: When the dollar has weakened versus other major currencies, the value style has tended to lead the U.S. equity market; when the dollar has strengthened, growth has tended to lead. In recent years, the dollar has generally strengthened, and we’ve seen growth-style equities outperform value for the majority of that time. Yet that trend began to reverse itself in the first quarter of 2025.
A cyclical shift? Value began to outperform in early 2025 as the dollar weakened
Performance of the Bloomberg U.S. Dollar Index and the Russell 1000 Value Index versus the Russell 1000 Growth Index, 1/1/05–4/3/25
Prospects for further currency volatility and implications for equity style differentials
While today’s tariff situation remains a wild card, we expect that trade tensions will remain at elevated levels, with some countries emerging either stronger or weaker economically amid the cycle of retaliatory measures. Signs of any deterioration in economic activity (or not) will determine the next leg of both the global stock and bond markets. We believe it’s likely that we’ll see volatility continue to play out in currency markets in coming months, with potential spillover effects for U.S. equity style performance differentials. It’s a drama that U.S. equity investors may wish to watch closely, coming off a quarter when the value style outperformed by a wide margin as the dollar weakened.
1 Bloomberg, as of 3/31/25.
Important disclosures
The views presented are those of the author(s) and are subject to change. No forecasts are guaranteed. This commentary is provided for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index. Any economic or market performance is historical and is not indicative of future results.
The S&P 500 Index tracks the performance of 500 of the largest companies in the United States. The Russell 1000 Index tracks the performance of 1,000 large-cap companies in the United States. The Russell 1000 Growth Index tracks the performance of large-cap companies in the United States with higher price-to-book ratios and higher forecasted growth values. The Russell 1000 Value Index tracks the performance of large-cap companies in the United States with lower price-to-book ratios and lower forecasted growth values. The Bloomberg U.S. Dollar Index (DXY) tracks the performance of the U.S. dollar relative to the value of a basket of world currencies. It is not possible to invest directly in an index.
Diversification does not guarantee a profit or eliminate the risk of a loss.
Investing involves risks, including the potential loss of principal. Value stocks may decline in price. Foreign investing, especially in emerging markets, has additional risks, such as currency and market volatility and political and social instability. Large company stocks could fall out of favor, and illiquid securities may be difficult to sell at a price approximating their value. These products carry many individual risks, including some that are unique to each fund. Please see each fund’s prospectus to learn all of the risks associated with each investment.
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