Most of us make assumptions about growth and value stocks. Here's what we get wrong.

MW Most of us make assumptions about growth and value stocks. Here's what we get wrong.

By Mark Hulbert

Reading too much into short-term market moves can land you in trouble

It's too early to declare value stocks the winner over growth stocks.

It's premature to conclude that value stocks have begun their long-anticipated resurgence over growth stocks.

I'm referring to the divide on Wall Street between growth (stocks of fast-growing companies that are investor favorites and trading for high P/E ratios) and value (stocks of companies that are out of favor and therefore trading for low valuation ratios). Value stocks have been out of favor for much of the past two decades.

Many investors now believe that value's fortunes began to change last fall. For example, Vanguard S&P 500 Value ETF VOOV beat Vanguard S&P 500 Growth ETF VOOG by 3.8 percentage points from mid-September 2025 through Jan. 26, according to LSEG Datastream. Value investors are making a big deal of this, declaring victory in their long-running battle with growth.

It's too early for that. The rising fortunes of value stocks over the past four months - the occasion for value investors to declare victory - barely registers in the chart below that compares these two Vanguard ETFs.

Notice also the numerous other upticks over the past decade, many of which were more substantial than this recent one. Yet none of those prior upticks represented the beginning of a longer-term resurgence of value over growth - even though, at the time of each uptick, value investors were quick to claim that the tide had turned.

To test whether my caution is justified by longer-term data, I turned to a database compiled by Dartmouth College professor Ken French, who has calculated the relative returns of growth and value stocks back to 1926. In this longer dataset, I looked for evidence that value stocks' relative strength trends tend to persist or reverse themselves.

I came up empty. Consider for example whether value stocks' relative strength over the trailing four months is correlated with their relative strength over the subsequent four months. I chose this time horizon because that's how long it's been since mid-September, when value started outperforming growth. The correlation coefficient for all rolling four-month periods since 1926 is slightly negative - meaning there's a slightly greater-than-even chance that four-month relative strength will be followed by four months of relative weakness.

I reached the same result when focusing on 12-month periods of relative strength or weakness. (In any case, these negative correlation coefficients at the four-month and 12-month horizons were not significant at the 95% confidence level.)

Valuation and expectations

There are other reasons to choose value over growth that have nothing to do with betting that its recent relative strength will persist. Perhaps the most powerful theoretical argument is that the average growth stock does not live up to the ambitious growth-rate assumptions that investors have when bidding their prices up to lofty levels. Similarly, the average value stock does not grow as slowly as investors assume.

This result was documented in a famous study two decades ago entitled "The Level and Persistence of Growth Rates." The researchers studied publicly traded U.S. stocks back to the 1950s, searching for those that had above-median sales growth for several years in a row. The results are summarized in the chart above. The red line shows the percentage of companies with above-median sales growth for the indicated number of years in a row, while the black line reflects what the red line's shape would be on the assumption of pure chance. Notice how close the two lines are to each other.

A more recent study, from Verdad Research, covering the years since that two-decade-old study, reached the same result.

These studies' conclusions are highly relevant today because investors are betting that growth stocks will grow at significantly faster rates over the next three to five years than value stocks. According to State Street, for example, the growth stocks within the S&P 500 SPX are projected to experience revenue growth of 16.5% annualized over the coming three to five years - almost twice the 9.2% annualized estimated revenue growth rates for the S&P 500's value stocks.

Yet if these growth rates regress to the mean, as they have in the past, value stocks are quite likely to outperform growth stocks over the next several years. But that has nothing to do with value stocks' relative strength over the past four months.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

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-Mark Hulbert

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January 30, 2026 08:10 ET (13:10 GMT)

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