Once again, Happy New Year, and we hope you had a wonderful holiday season with family and friends. What a year it was, with equity performance (as measured by the S&P 500) up 23%. And this comes after 2023, which was also very robust, up 24%. So, with back-to-back +20% years in the S&P 500 for the first time since 1997/1998, the question becomes, how long is this going to last? While no one (yes, we mean no one) can tell you what will happen in 2025 with any certainty, we thought it would be interesting to go one level below the surface to look at the extreme difference between growth and value stocks.
To begin with, let’s take a quick look at what makes a stock growth vs. value. This is one of the fundamental distinctions in the stock market. While both offer opportunities for solid returns, they tend to behave quite differently (especially recently). So, what are the primary differences?
At a high level, growth stocks represent companies expected to grow their earnings faster than the overall market. These companies typically reinvest most or all of their profits into the business to fund innovation, expand operations, and capture a larger market share. As a result, growth stocks rarely pay dividends, as their focus is on future potential rather than immediate shareholder returns. They often trade at higher price-to-earnings (P/E) ratios because investors are willing to pay a premium today for the possibility of substantial earnings tomorrow. However, this higher valuation also makes growth stocks more sensitive to changes in market conditions, which can result in greater volatility.
Examples of well-known growth stocks include Tesla (electric vehicles, automation, robotics); Amazon (e-commerce giant and cloud computing powerhouse); and NVIDIA (cutting-edge computer chips that power AI technologies and graphics processing).
In contrast, value stocks are shares of companies that are considered undervalued relative to their fundamental metrics, such as earnings, dividends, or book value. These stocks often trade at lower P/E and price-to-book (P/B) ratios, making them attractive to investors seeking bargains. Value stocks typically belong to more mature companies with stable revenue streams and a history of paying dividends, making them less volatile than their growth-oriented counterparts.
High-profile examples of value stocks include Johnson & Johnson (a healthcare and personal care giant); Berkshire Hathaway (an investment conglomerate led by Warren Buffett, which focuses on acquiring undervalued, high-quality businesses); and Coca-Cola (a household name that has grown its beverage empire through strategic initiatives).
With that background, interestingly, we find ourselves amid an all-time record for two-year performance of growth stocks, which are up 90% since the end of 2022. In data going back to the 1970s, the only comparable two-year runs were 2019/2020 and 1998/1999 (see below).
And while value has performed well over the last two years, up 27%, it pales in comparison to its growth counterparts. Given this, the two-year outperformance of growth vs. value reached an all-time high of over 60%. Due to the unprecedented nature of the outperformance, there are few historical comparisons. However, the two comparable periods of the late 1990s and post-COVID saw the script flip, with value outperforming to varying degrees.
So what does this mean? Should you sell all your growth stocks and move them to value stocks? We would say no. While growth stocks have done incredibly well, a diversified portfolio incorporating both growth and value stocks will likely be the right choice over the long term. This balanced approach can mitigate risk while taking advantage of the strengths of each investment style. Not to mention that timing the move from growth to value (or vice versa) is notoriously hard to do.
Markets / Economy
- Markets rallied on Friday after a sluggish week through the first four days. The S&P was down -0.5%, the Nasdaq was down -0.5%, and the small-cap Russell 2000 was up 1.1%.
- The ISM Manufacturing PMI rose by 0.9 points from last month to 49.3 in December 2024, ahead of market expectations of 48.4. The result reflected the best U.S. manufacturing number (though still contracting) since the 50.3 recorded in March, which was the sole period of expansion in the industry since September 2022.
Stocks
- U.S. equities were in negative territory. Materials and Consumer Discretionary led the decline, while Energy and Utilities outperformed. Growth stocks led value stocks, and small caps beat large caps.
- International equities closed lower for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield decreased two basis points to 4.60% during the week.
- Global bond markets were in positive territory this week.
- High-yield bonds led for the week, followed by government bonds and corporate bonds.
