The Analyst: understanding value and growth stocks

Economist John Maynard Keynes once said, “Markets can remain irrational longer than you can remain solvent.” It’s a reminder that markets often move in ways that feel disconnected from fundamentals, sometimes for decades. The recent gap between value and growth stocks is a perfect example.

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What do ‘value’ and ‘growth’ really mean?

Before going deeper, it’s helpful to clarify what investors mean when they talk about different style categories.

Value stocks: companies trading at lower prices relative to their fundamentals, such as earnings, book value, or cash flow. These companies may be out of favour, more mature, or simply overlooked by the market.

Growth stocks: companies expected to deliver above-average growth, often because of innovative products, strong revenue trends, or competitive advantages. Investors are willing to pay higher prices for their future potential.

It’s also important to note that companies can move between categories over time, sometimes in surprising ways. Many firms begin life as fast-growing innovators, eventually mature, and become value stocks. Others reinvent themselves and return to growth.

Meta Platforms Inc Class A (NASDAQ:META) is a good example. Although widely seen as a growth company, it is now the largest holding in the MSCI USA Value Index and has no weight in the Growth Index. Despite trading at about 27 times forward earnings, index rules still classify it as value, showing how labels don’t always match expectations.

Professional investors such as fund managers also define other style categories: 

Quality stocks: companies with stable earnings, strong balance sheets, and high profitability.

High dividend stocks: companies that return a larger share of earnings to shareholders through dividends.

US big tech is still leading the pack

Source: Morningstar as of 31 October 2025. Total returns in GBP.  Past performance is not a guide to future performance.

Over the past decade, growth stocks, especially in the US, have significantly outperformed value stocks. The difference has become so extreme that many investors have started to question whether value investing still works. Yet history shows that, over very long periods, value stocks have usually delivered higher returns than growth stocks in the US.

The basic idea is simple: when you buy companies at lower prices relative to their fundamentals, you’re often rewarded with higher expected returns. But there are periods when the opposite happens, sometimes for extended stretches. Today we are in one of those stretches. Understanding the reasons why and what it means for your portfolio, can help you make better long-term investment decisions.

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Today’s global equity bull market is driven mainly by US growth stocks, led by the “Magnificent Seven”: Apple Inc (NASDAQ:AAPL), Microsoft, Alphabet Inc Class A (NASDAQ:GOOGL), Amazon.com Inc (NASDAQ:AMZN), NVIDIA Corp (NASDAQ:NVDA), Meta, and Tesla Inc (NASDAQ:TSLA). Together, they make up a large share of the global index, more than Japan, the UK, China, Canada, France, Germany, and Switzerland combined.

This means investors who use passive global strategies often end up unintentionally concentrated in a small number of US tech companies and, even if international markets perform well, their impact on a global portfolio may be small compared with what happens to a few giant US growth stocks.

In the US market, the value vs growth difference is mainly driven by sector composition. Growth indices are dominated by technology and communication services sectors that have benefited from themes such as artificial intelligence (AI), cloud computing, and digital transformation. Value indices, on the other hand, are weighted toward financials, energy, industrials, healthcare, and consumer staples.

Over the past year, both cyclical value sectors (such as financials and energy) and defensive value sectors (like healthcare and consumer staples) have struggled to keep up with the continued strength of US mega-cap technology stocks.

As a result, valuations between growth and value stocks in the US are now at unusually wide levels compared with history.

Different story outside the US

Source: Morningstar as of 31 October 2025. Total returns in GBP. Past performance is not a guide to future performance.

Market leadership outside the US is not driven by big technology names, and that difference is important. In many international markets, value, high dividend, and quality companies have taken the lead, offering steadier performance and more attractive valuations.

Over three- and five-year periods value stocks in Europe and the UK have outperformed their local growth stocks. Some have even delivered stronger results than the S&P 500.

These outcomes are largely due to differences in sector make-up. Outside the US, growth indices have much less exposure to technology sectors. In Europe and the UK, the biggest growth sector is actually industrials, followed by healthcare. Meanwhile, value indices are more similar across regions, with financials and consumer staples playing a major role.

In terms of valuations, UK and European value stocks no longer look deeply discounted, and growth stocks are no longer unusually expensive. In the US, however, valuation gaps remain among the widest in decades.

What this means for long-term investors

Warren Buffett has long argued that separating stocks into “growth” and “value” categories is misleading. Growth is part of value: you cannot assess an investment’s value without considering its future growth. Value is simply paying less than something is intrinsically worth, and future growth is part of that worth. What matters is whether a stock is selling for less than its intrinsic value. Labels distract from the real question: is the price attractive?

Buffett also stresses that not all growth adds value. Businesses that need heavy reinvestment may destroy value, while those that grow with minimal capital can be extremely rewarding. In his view, all investing is value investing, and investors should focus the economics behind a business rather than its label.

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The industry has also adapted to bridge the gap between the two styles. For example, GARP investing (growth at a reasonable price) seeks companies with strong growth potential, but without overpaying in share price terms.

Understanding regional and style differences in global indices can help investors avoid or at least reduce portfolio concentration risk.

As always, a more diversified mix of assets across regions, sectors and styles can help investors build a more resilient portfolio. It helps investors to capture a broader set of return drivers, avoid overexposure to a single theme or region, and potentially benefit when market leadership eventually shifts. History suggests that such shifts often occur when they’re least expected.

Fund ideas

Fidelity Global Dividend W Acc invests globally across the 2,500 constituents of the MSCI ACWI Index, focusing on companies that combine healthy, sustainable dividend yields with long-term capital growth potential. defensively positioned in terms of sectors, with the largest positions in Financials, Industrials and Consumer Staples. The fund has a healthy proportion of service businesses relative to goods businesses, which have been less impacted by tariffs.

Notably, the fund avoids the Magnificent Seven stocks due to their cyclicality and high valuations, offering a differentiated global equity profile. Managed by an experienced team with a disciplined process, the strategy has delivered strong results and consistent annual dividend growth since inception, supporting its income-focused mandate.

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Dodge & Cox Worldwide Global Stock GBP Acc invests in established global companies that appear undervalued relative to their long-term fundamental strengths and profit opportunities. The approach to defining “value” is holistic, not only focused on companies trading at low valuations, but considering share prices in the context of the specific dynamics of a particular business. This can lead to some forays into stocks not typically associated with value and offers a differentiated exposure to global equities.

The bottom-up search for undervalued companies encourages a sector and geographic allocation that is notably different from growth-heavy global indices. The fund is backed by a strong management team overseeing the funds via an investment committee structure and supported by the deep research resource of Dodge and Cox.

Both funds appear on interactive investor’s Super 60 list of investments ideas.