Value Stocks: A 2025 Comeback?

Growth stocks significantly outperformed value stocks in 2024. However, over the past six months, mid-cap value stocks have surged ahead. There are several reasons why value stocks could experience a resurgence in 2025. Investors may find more attractive valuations in value stocks this year. The past two years have witnessed an impressive run for growth stocks, propelling the Nasdaq approximately 85% higher to nearly 20,000 since the end of 2022.

Growth stocks like NVIDIA have contributed to the S&P 500's consecutive 20%-plus gains for two years, a feat last accomplished in 1998. The technology and growth-heavy Nasdaq concluded 2024 with a gain of about 30%, while the S&P 500 rose by 23%. Most of these gains stemmed from growth stocks, as the S&P 500 Growth index increased by 35% compared to the S&P 500 Value index, which rose by only 9.5%. Including mid-caps reveals a similar trend, with the Russell 1000 Growth Index climbing 32% and the Russell 1000 Value index gaining just 12%. After two years of exceptional growth, should investors consider shifting towards value stocks? Growth stocks are argued to be overvalued. While there were predictions of market broadening in 2024, anticipating a shift from expensive large-cap stocks to smaller-cap stocks, this happened to a limited extent. Smaller-cap stocks experienced a rally in the second half, but large-cap valuations have remained elevated. Despite a summer decline that lowered the S&P 500's P/E ratio, a fall rally fueled by interest rate cuts and other factors sent large caps soaring, pushing valuations back towards a P/E of 30 for the S&P 500. A negative December for the S&P 500 slightly reduced valuations, but as of January 2, the S&P 500's P/E remained at 29, historically high. Although not as high as 2021 when it reached 40, the P/E is nearing its highest point since then

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