- Growth outperformed value by a wide margin in 2024.
- However, over the past six months, mid cap value stocks have beaten growth.
- There are several reasons why value stocks should bounce back in 2025.
Investors may find more value in value stocks this year.
The last two years have seen growth stocks go on an incredible ride, pushing the some 85% higher to almost 20,000 since the end of 2022. Further, growth stocks like NVIDIA (NASDAQ:) have propelled the to two straight years of 20%-plus gains. That’s the first time that has happened since 1998.
The technology and growth-heavy Nasdaq finished 2024 up about 30%, while the S&P 500 gained 23% last year. Most of the gains came from the growth stocks, as the gained 35% last year, while the rose just 9.5%.
If you add midcaps to the mix, you see that it was nearly as lopsided. The rose 32% last year, while the climbed just 12%.
But after two years of incredible growth, should investors be looking for more value?
Growth Stocks Are Overvalued
There was a lot of talk about the broadening of the market in 2024, as experts anticipated that investors would move more into smaller cap stocks from overpriced large caps. That happened, to an extent, as smaller-cap stocks rallied in the second half.
But large cap valuations have remained high. While a summer swoon brought the S&P 500’s P/E ratio down a bit, a fall rally spurred by interest rate cuts, among other factors, sent large caps soaring. With that, valuations increased again, rising back toward a P/E of 30 for the S&P 500.
A negative December for the S&P 500 brought valuations down a bit, but as of January 2, the P/E of the S&P 500 was still 29, which is historically high. It is not as high as 2021 when it hit 40, but the P/E is close to the highest it has been since then.
However, perhaps a better gauge of growth stock valuations is the Nasdaq 100, which is almost entirely made up of growth stocks. As of December 31, the Nasdaq 100 P/E was 36.68, nearly at the all-time high level of 38.57 in 2021.
Mid-Cap Value Surges in Second Half
Value stocks come into 2025 with some momentum. While the annual returns versus growth stocks paled in comparison, value stocks closed the gap somewhat in the second half. Over the past six months, the Russell 1000 Growth index has returned 19% compared to 14% for the Russell 1000 value index.
The gains for the Russell 1000 Value index fall almost entirely within the mid cap space. Mid cap value stocks, as measured by the S&P 400, returned 21.5% over the past six months, compared to just 8% for the S&P 400 Growth index. That’s a trend that investors should take note of.
There are several factors that should help value stocks in 2025. The first, as mentioned, is the extremely high valuations on the S&P 500 and Nasdaq. After two years of huge gains, many have shot well above their historical ranges. That is a red flag for some stocks, especially those that don’t have the earnings power to match it. Investors should be checking the P/E ratios, but also, look at their 2025 outlook for earnings expectations.
That could spark a rotation out of overvalued stocks into stocks that are undervalued relative to their growth potential. In the coming weeks, we’ll take a deeper dive into some value stocks to consider in 2025.
Value Should Rebound in 2025
Tony DeSpirito, global chief investment officer, fundamental equities at BlackRock (NYSE:), highlighted several other reasons to boost value exposure in 2025.
One is simply diversification. The strong run by growth stocks has left value under-represented in large cap indexes. As of November 30, growth stocks made up 37% of the S&P 500, which is higher than its historical average of 24%.
“This concentration may inadvertently leave many portfolios lacking in diversification and underexposed to value stocks ― and, therefore, at risk of missing the potential upside of value rallies such as the one we’ve seen since July,” DeSpirito wrote in BlackRock’s Q1 2025 “Taking Stock” newsletter.
The BlackRock CIO also said that a healthy allocation of value stocks can provide “portfolio insulation should market winds change.” For example, when the market tanked in 2022, portfolio losses were offset by value stocks, which typically outperform in downturns.
DeSpirito also cited the fact that the valuation gap between the Russell growth and value indexes is at its widest since December 2000. That was near the beginning of a three-year bear market that ran through 2002. From that point in December 2000, value stocks outperformed growth stocks over the ensuing three- and five-year periods.
“We believe that means potential for ample upside should value stocks begin to climb back toward historic norms, particularly as lofty growth stock valuations may draw investors toward value as the market begins to broaden and reward company fundamentals beyond the mega-cap leaders,” DeSpirito said.