Value vs. Growth: Why 2025 Might See a Shift in Investment Favor

Value stocks could outperform in the near future given recent market conditions in which growth stocks have seen historically high valuations and investors might be shifting towards more stable, undervalued value options. However, the performance of individual stocks will depend on specific company fundamentals and market dynamics.

Value stocks have outperformed growth stocks historically, especially during economic uncertainty and market downturns. Value stocks typically outperform during economic recessions and market downturns, while growth stocks excel during bull markets or periods of economic expansion. Companies that usually qualify as value stocks have established, stable business models and are often found in mature industries. These companies usually have low price-to-earnings (P/E) and price-to-book ratios, high dividend yields, and steady cash flows. Common sectors for value stocks include financials, healthcare, and industrials. These companies often trade at a discount relative to their intrinsic value, offering the potential for long-term appreciation. Value’s largest weights are in health care and financials, followed by industrials, IT, consumer staples, and energy. This is a very different mix than 10 years ago when energy and financials were the largest sector components. Growth stocks are highly concentrated in technology, followed by energy and consumer discretionary.

Growth stocks have recently outperformed their value stock peers despite rising interest rates. Stellar performances from major tech companies have driven this outperformance. Growth stocks have been having a sustained rally, with the last decade driven by large tech companies with massive opportunities and secular trends. Tech stocks such as Meta Platforms (NASDAQ:), Alphabet (NASDAQ:), Nvidia (NASDAQ:), Amazon (NASDAQ:), Apple (NASDAQ:), Microsoft (NASDAQ:), Netflix (NASDAQ:), and Tesla (NASDAQ:) – have come to dominate the market.

The interest rate environment significantly impacts the performance of growth versus value stocks. Growth stocks can also benefit from low interest rates because their future earnings are discounted at a lower rate, increasing the present value of their stock prices. Conversely, rising interest rates can negatively affect growth stocks by reducing the present value of their future earnings. Value stocks, which offer stable cash flows and dividends, are generally more resilient during rising rates and can benefit from lower borrowing costs when rates decline. Value stocks are seen as potentially more attractive if interest rates decrease or economic growth slows, as they often offer dividends and are priced lower relative to earnings. Value stocks could outperform in 2025 due to their lower valuations and higher dividend yields.

Investing in value stocks also carries several risks. Firstly, these stocks often belong to industries sensitive to economic cycles, meaning they can be more affected during downturns. Additionally, value stocks may be undervalued for good reasons, such as underlying financial or industry challenges that could prevent them from rebounding. There is also the risk of “value traps,” where stocks appear undervalued but continue to underperform due to persistent long-term industry trends and business model challenges and issues. Lastly, while value stocks generally have lower volatility, they still carry the risk of business-cycle impacts and potential bankruptcy.

Generative AI is also a risk to a positive outlook for value stocks. If the optimism about AI is matched by the reality of an enormous addressable market that could drive exponential earnings growth over the coming years, regardless of the economic cycle. In this scenario growth stocks could continue to enjoy a multiyear period of outperformance. That said, we see signs that markets are differentiating between mega-cap tech stocks more. As recession fears have receded, the equity rally is broadening to include value-oriented sectors.

There are times when growth stocks are undervalued, and plenty of value stocks grow. It should be noted that there have been times when some of the same stocks designated as “value” at one point were designated as “growth” stocks at other points. A pragmatic approach to value investing, where investors focus on paying the right price for a company’s business resilience and growth profile, will help avoid the classic value traps. Since there are pitfalls in relying on any historical model to predict the next cycle, we think asset owners should seek more balance in their portfolios after growth’s long rally. Maintaining a balanced portfolio with value and growth stocks is an excellent way to mitigate risk.

David Rosenstrock, CFP®, MBA, is the Director and Founder of Wharton Wealth Planning ( ). He earned his MBA from the Wharton Business School and B.S. in economics from Cornell University. He is also a CERTIFIED FINANCIAL PLANNER™.