By Jacob Sonenshine
If it feels like growth stocks can't continue their outperformance much longer, ignore that feeling.
The Vanguard S&P 500 Growth Index Fund Exchange-Traded Fund, home to companies with high sales growth including Nvidia, Advanced Micro Devices, Microsoft, and Eli Lilly, is up 13% in the past month.
That beats the just over 4% gain for the Vanguard S&P 500 Value Index Fund ETF, more weighted toward cheaper stocks such as UnitedHealth and Bank of America.
A couple of factors have driven the performance of the growth stocks.
Semiconductor stocks have soared on the back of undying chip demand. Their earnings estimates have risen in the past month, according to FactSet, as the hyperscalers (massive technology services companies such as Alphabet) invest more in their data centers to build out AI.
Meanwhile, software stocks have recovered from their lows. Microsoft and Oracle have shown their cloud computing services are key for OpenAI and Anthropic, and cybersecurity stocks are recovering, as the market sees them as insulated from the competitive threat of Anthropic's cyber product, Mythos.
Value has performed fine, but it's impossible to keep up with growth companies' momentum. The value ETF has recovered all of its Iran war-related losses, and has touched record highs. The economy continues to grow, and even though the Iran-driven oil price shock has driven a little short-term inflation, the Federal Reserve may keep interest rates where they are.
The question for investors becomes what to do with these growth stocks that are at such lofty heights. The value of many portfolios is now heavily weighted toward growth, creating risk, considering that much of the expected earnings are reflected in the stocks, making them vulnerable to any disappointments on data center build-outs or software demand.
The answer is that holding on to the growth names makes sense. After the growth fund outperforms the value fund by 10 percentage points or more in a one-month period, the growth fund goes on to average another 10 points of superior performance for the following 12 months, according to Dow Jones market data. In only one instance out of 10 did growth go on to underperform.
That was in July 2020, just before the economy enjoyed a shot in the arm. Covid vaccines would soon become widely available, while trillions of fiscal stimulus dollars flooded the U.S., sending tons of "value" stocks soaring, as the market knew earnings across the board would surge. That favored value.
But among all of the key economic focal points today -- geopolitical issues, mildly high inflation, an incoming Fed chair in Kevin Wash and his policy philosophy, a strong but not-super-hot labor market -- most are not candidates to cause a major economic growth spurt. That means "growth" companies can continue to post relatively strong earnings growth.
AI adoption is continuing, making the major software companies integral, while hyperscalers have shown no signs of slowing down their data center and chip investments. Analysts covering companies in the growth ETF expect, in aggregate, to see premium profit growth.
We know growth stocks will see stronger earnings growth in 2026 versus value.
But analysts expect 21% earnings growth for the growth fund in 2027, driven by 14% sales growth and profit margins that will inch higher. That's better than the value fund's expected 12% earnings growth, a result of slower sales growth. As long as these projections don't experience much disruption from the companies spending money on compute and data centers, these numbers can bring growth stocks higher -- and help them outpace value.
The last question is about valuations. If the market sees reason for long-term growth in technology to slow down, growth stocks' price/earnings multiples will drop, hurting the case for the broad group. Absent that fear, growth will maintain its premium P/E multiple.
Growth valuations aren't even that out of control, so strong earnings could certainly push the stocks higher. The growth ETF trades at just under 22 times next 12 months earnings, about 3 points above the value fund's just under 18 times. At many points in the last few years, the gap was over 10 points, with growth sometimes above 30 times.
Sometimes the best action is no action. Hold these growth stocks.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
May 11, 2026 13:20 ET (17:20 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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