Growth Stocks vs Value Stocks (2024)

FAQs

Growth Stocks vs Value Stocks? ›

Growth investors are willing to pay higher prices for companies that are expected to grow faster than their industry or the overall market. By comparison, value investors take on less risk and instead look for companies whose stock prices are below their worth.

Value stocks often achieve lower price gains because their medium- to long-term growth potential often turns out to be lower. A potential lack of growth may lead to a lower valuation of the stock in the long run, or investors may have to wait longer for the expected price appreciation.

Unlike growth stocks, which typically do not pay dividends, value stocks often have higher than average dividend yields. Value stocks also tend to have strong fundamentals with comparably low price-to-book (P/B) ratios and low P/E values—the opposite of growth stocks.

34% of "growth stocks" in the S&P500 growth index have growth rates than are lower than the median growth of value stocks, and 35% of "value" stocks have growth rates higher than the median growth stocks.

For the value index, the median ROIC, averaged over three years, and excluding goodwill, is only 15 percent, compared with 35 percent for the growth index (Exhibit 2). In other words, the average growth stock is likely to deliver twice the average value stock's book return on capital.

The intrigue deepens when we consider the anticipated decline in interest rates for 2024. According to conventional wisdom, this should herald another favorable year for growth stocks relative to value. Yet, the lessons from 2023 remind us that markets are unpredictable, and historical patterns may not always hold.

Value dominance tends to assert itself when inflation is high, economic growth is strong and rates are elevated. By contrast, Growth stocks often outperform when inflation is low, economic growth is relatively weak and rates are low and falling.

Low interest rates and astronomically high-tech stock values that don't conform to conventional financial measures are two of these. Value investing as a concept is still useful today, despite all these obstacles.

We expect lackluster global earnings growth with downside for equities from current levels.” Against this backdrop, value stocks have a strong chance of outperforming their growth counterparts in 2024.

Do value stocks outperform growth? ›

Value premiums have often shown up quickly and in large magnitudes. For example, in years when value outperformed growth, the average premium was nearly 15%. On average, value stocks have outperformed growth stocks by 4.4% annually in the US since 1927, as Exhibit 1 shows.

Since Buffett took control of Berkshire Hathaway in 1965, the stock has trounced the S&P 500. Its compound annual gain through 2023 was 19.8% versus 10.2% for the broader index. But Buffett says those days of market-trouncing returns are behind it.

Our analysis considers these arguments and concludes they have merit, but our research suggests that four key factors drove the underperformance of value and the outperformance of growth over the past decade: inflation, real interest rates, the corporate profits growth rate and equity market volatility.

Stocks are always fully represented by the combination of their growth and value weights. For example, a stock that is given a 20% weight in a Russell value index will have an 80% weight in the corresponding Russell growth index.

For example, value stocks tend to outperform during bear markets and economic recessions, while growth stocks tend to excel during bull markets or periods of economic expansion. This factor should, therefore, be taken into account by shorter-term investors or those seeking to time the markets.

Value stocks are considered relatively less risky compared to growth stocks. They are typically more stable and have lower volatility. The potential for capital appreciation may be moderate, but they often offer steady income through dividends.

Growth stocks generally perform better during bull markets, when interest rates are falling, and when corporate earnings are trending up. However, during economic slowdowns, growth tends to lag behind value. Similarly, value tends to outperform growth during bear markets and in the early stages of economic recovery.

Value stocks are expected to gain value eventually when the market corrects their prices. In the unlikely event that the stock doesn't appreciate in value as was expected, investors can lose their money. Hence, value stocks are relatively riskier investments.