Value Stocks vs Growth Stocks: 2026 Market Outlook & 2025 Performance Recap
AI Podcast
Growth stocks outperformed value stocks significantly in 2025, particularly in large-cap indices, despite an initial investor rotation towards value and defensive sectors. Valuations remain elevated, with the CAPE ratio at a dot-com boom level, suggesting long-term concerns. Analysts project moderate S&P 500 returns for 2026, with AI expected to benefit value and international stocks long-term. Investors should focus on individual stock valuations, using P/E ratios as a caution indicator.
TradingKey - By the end of 2025, growth will have outperformed value by a wide margin across all sectors. Even though 2025 started with strong performance for value stocks (for two years), many investors were concerned about the possibility of continuing to see high valuations for growth stocks.
As a result of these popular fears, investors have begun to rotate away from large-cap growth stocks that were overvalued, into small-cap value stocks, and into more stable defensive stocks (like utilities).
In April 2025, after the announcement of tariffs on American goods, the stock market bottomed and was able to rally due to lower valuation levels. This rally fueled an increase in technology stocks and a rally in the Nasdaq that ended with a total return of (20%) in 2025.
Growth vs. Value Performance
The performance of the S&P 500 Growth Index has been very strong (19.9%) during the last year relative to the S&P 500 Value Index (12.3%).
In addition, the performance of the Russell 1000 Growth Index was also solid (16.3% vs 15.1% for the Russell 1000 Value Index). In the small-cap space, Russell 2000 Growth returned 13.0% while Russell 2000 Value returned 11.9%.
Finally, there was little difference between the performance of S&P Midcap 400 Growth and S&P Midcap 400 Value, with returns of 8.1% and 7.8%, respectively. Overall, growth outperformed value to a much larger extent in the large-cap style index than either of the other two style indexes did.
2026 Market Setup: Valuations and the Ongoing Debate
As 2026 gets underway, it appears that the markets are no different than they were a year earlier, since the rally in the second half of the year resurrected valuations and renewed fears that technology and growth could again become over-extended in value.
The S&P 500 PE ratio is approximately 28 as of late 2022, according to GuruFocus, and while this is still above the historical average, it is much lower than the level of approximately 41 at the peak of the technology boom in 2021.
The Nasdaq 100 is trading at approximately 34 times earnings, again high, but down from approximately 39 at the beginning of 2025.
The most concerning indicator is the CAPE (Shiller) ratio, which stands at 40, above the peak level in 2021; the only recent occurrence where the CAPE was as high as 40 was in late 1999 during the dotcom boom, and since it reflects inflation-adjusted earnings over the prior ten years rather than over the last 12 months, the ratio suggests long-term valuations have reached extraordinary levels and need to be monitored closely.
2026 Return Projections
Analysts predict more moderate increases over the next year for the S&P 500 than were seen last year, with estimates currently centering around 8,100 at the upper bound, representing a return of roughly 17 percent, to 7,100 at the lower bound, equating to approximately a 2 percent increase.
While they agree that companies engaged in AI will provide higher returns, Vanguard believes that the benefits from AI will begin to accrue to companies that are more focused on value stocks in the next phase of growth, and both value and international stock markets will have a better opportunity than technology companies over the following five to ten years, based on the growth of AI
The Impact of AI on Value and Growth Stocks
In November 2025, Joe Davis, Vanguard's global chief economist, expressed concern about the "heady expectations" for U.S. tech facing two hurdles.
The first hurdle is high earnings expectations. The second is that when markets think about profit growth, they generally undervalue how volatile the creative destruction caused by new entrants will be to aggregate profitability.
This means that as this relationship evolves, the volatility of tech (and therefore all of the U.S. market) will likely increase, which affects the way investors weigh value versus growth stocks in their diversified portfolios.
Key Considerations for Investors Moving Forward
Although no one is certain of where the markets will go next, the best discipline is to stay focused on relative valuations on an individual stock level.
If a company's P/E ratio is significantly higher than its long-term average P/E, use this to guide you with a caution sign (yellow flag) as you evaluate additional reasons for such a large P/E premium at current prices before you fully invest.
This thought process helped in the rotation that occurred in 2025, and it may be just as vital if value stocks make a comeback in 2026.
