Growth vs Value Stocks

Growth investors pay up for expected future earnings; value investors look for businesses trading cheaply relative to what they already produce. Both styles fall in and out of favor with the economic cycle.

Two different bets on the future

Growth investing centers on companies expected to grow earnings and revenue faster than average, often in newer industries or with expanding markets. Because so much of the expected value lies in future profits, growth stocks typically trade at higher valuation multiples — investors are paying more today for each dollar of current earnings, betting that earnings will scale up substantially.

Value investing centers on companies that appear cheap relative to their current earnings, assets, or cash flow, often more mature businesses in established industries. Value investors are betting that the market is underpricing what the company already produces, rather than betting on a future growth trajectory.

Characteristics of each style

Growth companies often reinvest heavily rather than pay dividends, since the priority is expanding the business rather than returning cash to shareholders. Their valuations tend to be more sensitive to changes in expectations, which can make growth stocks more volatile — a hint of slowing growth can hit the share price disproportionately hard given how much future growth was already priced in.

Value companies more often pay dividends and trade at lower price-to-earnings ratios. Because less of their valuation depends on distant future growth, value stocks can be less sensitive to shifts in growth expectations, though they carry their own risks if the underlying business is cheap for a structural reason rather than a temporary one.

How each tends to perform across cycles

Growth stocks are generally more sensitive to interest rates, since a larger share of their expected value comes from earnings far in the future, and higher rates reduce the present value of those distant cash flows more than they reduce the value of near-term earnings. This is a large part of why growth stocks have often underperformed during periods of rising rates and outperformed when rates are falling or low.

Value stocks, with more of their value tied to current earnings, tend to be less directly exposed to that dynamic, and have historically held up relatively better during rising-rate or economically uncertain periods, though neither style outperforms in every environment.