Should I invest in value or growth stocks now? (2024)

Should I invest in value or growth stocks now?

While growth stocks handily outperformed value from 2015 through 2021, 2022 was a different story. Growth stocks, represented by iShares S&P 500 Growth ETF (IVW), sank 30% in 2022.

While growth stocks handily outperformed value from 2015 through 2021, 2022 was a different story. Growth stocks, represented by iShares S&P 500 Growth ETF (IVW), sank 30% in 2022.

Some studies show that value investing has outperformed growth over extended periods of time on a value-adjusted basis. Value investors argue that a short-term focus can often push stock prices to low levels, which creates great buying opportunities for value investors.

Additionally, value funds don't emphasize growth above all, so even if the stock doesn't appreciate, investors typically benefit from dividend payments. Value stocks have more limited upside potential and, therefore, can be safer investments than growth stocks.

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.

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.

Value stocks have consistently underperformed growth stocks for many years. Yet, there are some signs that 2024 could herald a change in trend. Underperformance in value stocks was exacerbated in 2023 as many growth stocks, in the tech sector, saw huge gains due to excitement around artificial intelligence (AI).

Historically, value investing has outperformed growth investing over the long term. Growth investing, however, has been shown to outperform value investing more recently. One recent article noted that growth investing had outperformed value investing over the last 25 years.

Yes, particularly if you want to survive economic setbacks. The core of the long-term value investing approach is identifying well-financed companies that are well established in their businesses and for the most part have a history of earnings and dividends.

Value stocks are considered relatively less risky compared to growth stocks. They are typically more stable and have lower volatility.

What are the disadvantages of value stocks?

The Cons of Value Investing

Only investing in value stocks means that you may miss out on some gains. It can be challenging to find truly undervalued stocks. There can be thoughts out there about what a stock is worth, and it can be relatively difficult to determine which stocks are undervalued.

Looking back at the recessions of 1980, 1982, 1991, 2001, and 2009, we find growth tends to outperform value in the 12 months prior to a recession through to the trough of the recession. As the economy exits a recession, value tends to outperform growth.

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.

For now at least, analysts are anticipating S&P 500 earnings growth will continue to accelerate in the first half of 2024. Analysts project S&P 500 earnings will grow 3.9% year-over-year in the first quarter and another 9% in the second quarter.

As a whole, analysts are optimistic about the outlook for stock prices in 2024. The consensus analyst price target for the S&P 500 is 5,090, suggesting roughly 8.5% upside from current levels.

Large cap, mid cap, and value funds are the best mutual funds to invest in 2024 based on their past one-year returns. Investing in mutual funds has always been a popular choice for investors seeking long-term growth and diversification.

Why 3 year return is higher than 5 years?

True, over the above 5-year period, the rate of return may have been slower compared with the 3-year growth. This could be because the initial 2 of the 5 years may have been lacklustre. But it could be the reverse too.

While small cap growth stocks offer higher potential rewards, they also come with higher volatility and greater risk levels. Small cap value stocks, on the other hand, may be more stable but could take longer to realize their full potential.

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. There are two main reasons why inflation appears to favor Value stocks.

Again, these ratios are often used in a comparative sense, so what's good or bad is often dependent on what you're comparing it against. To give you some sense of what the average for the market is, though, many value investors would refer to 20 to 25 as the average P/E ratio range.

In contrast, investors see value stocks as undervalued by the market, believing that their true worth is higher than the current price. Investors expect the price of value stocks to increase, but not as aggressively as growth stocks.