Key Takeaways:
Growth stocks have decisively outpaced their value counterparts over the past month, with the Vanguard S&P 500 Growth Index Fund ETF (VOOG) surging 13 percent while the equivalent value fund gained just over 4 percent.
"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 an analysis of Dow Jones market data published by Barron's.
The rally has been fueled by surging semiconductor stocks like Nvidia Corp. and Advanced Micro Devices Inc. on strong demand for artificial intelligence data centers, alongside a recovery in key software names such as Microsoft Corp. The outperformance was so significant that in nine of the last 10 instances of such a wide monthly gap, growth stocks continued to lead value for the subsequent year.
The key question for investors is whether this trend can continue. With analysts projecting 21 percent earnings growth for the growth ETF in 2027—well ahead of the 12 percent expected for the value fund—the momentum may be sustainable, provided AI-related investments don't falter.
Despite the strong run, valuations for growth stocks do not appear overly stretched compared to recent history. The growth ETF currently trades at just under 22 times forward earnings, a premium of about four points over the value fund’s multiple of nearly 18 times. At various points over the last few years, that valuation gap has exceeded 10 points.
The one instance of underperformance in the historical data occurred in July 2020. That period preceded a broad economic recovery fueled by Covid vaccine rollouts and significant fiscal stimulus, which lifted earnings across the board and favored cheaper, value-oriented stocks. Current economic conditions, characterized by a strong but not super-hot labor market and persistent inflation, do not point to a similar broad-based surge, suggesting companies that can generate their own growth will continue to be rewarded.
As long as analyst projections for superior sales and earnings growth hold true, the case for holding onto these high-flying stocks remains intact.
This article is for informational purposes only and does not constitute investment advice.
