Growth stocks usually lag when interest rates rise. But not this year. Here's why that's concerning.

Growth stocks' surprising strength in the face of rising rates is reminiscent of the last few months of the dot-com bubble.

Yet another warning sign of a stock-market bubble is coming from growth stocks' surprising strength.

I say "surprising" because, despite sharply higher interest rates over the past six month, they have handily beaten value stocks. It's usually just the opposite.

Growth stocks (those trading for relatively high ratios of price to earnings, cash flow, book value and so forth) typically exhibit the greatest relative strength when interest rates are falling - not rising. That's because a greater share of their fundamental value comes from future years, and as a result they suffer disproportionately when higher interest rates are used to calculate those future years' present value.

Value stocks, of course, are just the opposite. They trade for relatively low price ratios, and so more of their fundamental value comes from current earnings. The present value of those earnings is therefore relatively immune from interest-rate increases.

Try telling this investment principle to growth stocks this year. The Treasury's 10-year yield BX:TMUBMUSD10Y hit its 2026 low in late February at 3.99%, but after the Federal Reserve's interest-rate hike this week, it's been trading about a full percentage point higher. Yet since the February low, the Vanguard S&P 500 Growth ETF VOOG has beaten the Vanguard S&P 500 Value ETF VOOV by 9.9 percentage points - 15.2% to 5.3%, according to LSEG total return data (through Sep. 16).

Growth stocks' surprising strength in the face of rising rates is reminiscent of the last few months of the dot-com bubble. From the end of 1999's third quarter to when the Dow Jones Industrial Average DJIA hit its bubble high in mid-January 2000, the Treasury's 10-year yield rose 85 basis points - almost as much as it has since this year's February low. Over this four-month period the S&P 500 Growth Index (to which the VOOG ETF is benchmarked) outperformed the S&P 500 Value Index by 8.2 percentage points.

The reason such strength constitutes a bubble warning is that investors have to be particularly exuberant in order to bid growth stocks higher in the wake of rising interest rates. It would be remarkable for growth stocks just to hold their own when rates are rising, since even that assumes earnings will grow faster despite rising rates. But it strains credulity to assume that earnings will grow so much more quickly that, even after being discounted at higher interest rates, they still come out ahead.

While the analogy between recent months and the top of the dot-com bubble is stark and alarming, it's not the only evidence pointing to the downside risk of exuberant earnings-growth assumptions. Take a look at the above chart, which plots the correlation between earnings-growth rates and the S&P 500's return. On average since 1927, according to Ned Davis Research data, the S&P 500 SPX performed significantly better in quarters in which earnings were growing more slowly - or even falling modestly.

To apply the lesson of this chart to today, consider that analysts are projecting year-over-year earnings growth of 26.3% for the fourth quarter of this year (according to FactSet). After the dot-com bubble burst in early 2000, value stocks hugely outperformed growth stocks, and it wouldn't be surprising if something similar occurs in the coming months.

With that thought in mind, the list below contains those value stocks currently recommended for purchase by at least two of the investment newsletters monitored by my performance-auditing firm. Included are only those recommended stocks with ratios of price to earnings, cash flow, sales and book value that are lower than the S&P 500's and which also have a higher dividend yield.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

-Mark Hulbert