Why Value Stocks Are Outperforming Growth Stocks and Will This Outperformance Continue

Vyacheslav Dvornikov

Apr 1, 2025

The S&P 500 Value index of the largest American companies fell by 0.2% in the first quarter, while the S&P 500 Growth dropped by 8.6%. The reasons for the rotation from growth to value are concerns about the historically high valuations of tech company stocks. Additionally, the import tariffs imposed by Donald Trump's administration have reduced investors' risk appetite, notes Bloomberg.

In the past, such movements were short-lived. Over the last two decades, the S&P 500 Value has outperformed the S&P 500 Growth in only five years. During this time, they have grown by 202% and 600%, respectively. This time, investors say that profit expectations are so modest that value companies have every chance to beat them when the earnings season starts next month. "The bar for value companies has been set quite low, especially compared to the uncertainty surrounding growth companies and their ability to meet profit forecasts," says Dan Morgan, senior portfolio manager at Synovus Trust. If value stocks can at least meet expectations or slightly exceed them, they have the opportunity for outperformance.

Analysts expect that in the first quarter, the profit of value companies will fall by 12% compared to a year earlier, while growth companies are forecasted to see a 20% increase, according to Bloomberg Intelligence data. Proponents of value stocks argue that their relatively low price already reflects weak profit expectations. Meanwhile, the market's hopes for growth companies, primarily tech ones, have significantly increased in recent years due to the hype around artificial intelligence.

S&P 500 Growth is trading at 25 times the expected earnings over the next 12 months, while S&P 500 Value is at 18. The so-called "Magnificent Seven," which includes Nvidia, Apple, and other large companies, is trading at an average multiple of 27, even though its valuations have decreased by 32% since mid-July.

Value stocks have recently so rarely outperformed growth stocks in terms of returns that it immediately becomes a topic of discussion. Just like now. If the "Magnificent Seven" is trading at a forward P/E=27, S&P 500 Growth at a forward P/E=25, and value stocks at a forward P/E=18, then which of them is relatively cheaper? I dare say that growth stocks are, because growth is a key factor in value, and it is incomparably higher for them—both in principle and in the near term, as mentioned in the article. The current relative valuation does not reflect the growth gap. So if I were to invest now, I would prefer the "seven." Another question is whether the stocks have fallen enough or if it's worth waiting a bit longer? Valuations are still quite high, but the economy is slowing down, making a Fed rate cut more likely and faster, which should support prices.