As 2024 draws to a close, growth stocks have once again outperformed value stocks. If it seems like growth stocks typically outperform value stocks, you'd be right when you look back over the past 10 years.
This is seen in the return of the Vanguard Growth ETF(NYSEMKT: VUG) compared to the performance of the Vanguard Value ETF(NYSEMKT: VTV). The Growth ETF tracks the CRSP US Large Cap Growth Index, which is the growth side of the S&P 500while the Value ETF looks to replicate the CRSP US Large Cap Value Index, which is essentially the value side of the S&P 500.
Over the past decade, the Growth ETF has easily outperformed its Value ETF counterpart, with an average annual return of 15.6% at the end of November. In comparison, the Value ETF has had an average annual return of nearly 10.8% over that same stretch. On a cumulative basis, that's a return of 326% versus a return of 178% – a huge difference.
Meanwhile, it's not just a few big years that have helped to outperform the Growth ETF. The ETF has outperformed the Value ETF in eight of the past 10 years. The only years during that period when the Value ETF outperformed were during the 2022 bear market, when the Growth ETF fell 33.1% and in 2016.
Given the dominance of the Vanguard Growth ETF over the past decade, it would be easy to dismiss the Value ETF. However, growth and value investing tend to go through cycles.
Although growth stocks outperformed 2008, value stocks outperformed between 2001 and 2008 following the dot-com bust. Value stocks also outperformed between 1984 and 1991 as well. Nobel Prize winner Eugene Fama and Dartmouth professor Kenneth French have complied data showing that value stocks over 15-year rolling periods have outperformed growth 93% of the time between 1927 and 2019.
Next year could be a favorable environment for value stocks. They are often more cyclical in nature and can also be more sensitive to interest rates, as they tend to carry more debt. If the Federal Reserve continues to lower rates next year and the economy as a whole picks back up, it could be a very good scenario for these stocks.
Meanwhile, growth companies have risen to become the largest and most prominent companies in the world. Seven of the top 10 stocks in the S&P 500 are currently classified as growth stocks, arguably Broadcomwhich is classified as a value stock, also be a growth stock. Meanwhile, these seven highest growth companies are looking at a potential generational opportunity with artificial intelligence (AI) technology.
Image source: Getty Images.
While comparisons can certainly be made between the dot-com boom and the current AI craze, there are key differences. The big one is that AI technology is being driven by highly profitable, cash-rich tech companies that have established strong businesses outside of AI in a variety of fields. Meanwhile, the dot-com boom spawned many unprofitable, ultimately unsustainable businesses.
However, one case for value is that the Vanguard Growth ETF has become too concentrated at the top. An apple, Nvidiaa Microsoft now accounts for almost 32% of the ETF's portfolio. The performance of these three stocks will largely shape the performance of the ETF.
Apple could be the biggest stock to watch, as the company's valuation has increased to 42 times price-to-earnings (P/E) ratio on hardly any revenue growth in the last few years. While the company sees a shift to higher gross margin service revenue, the stock could be vulnerable if it doesn't see an AI-fueled iPhone upgrade cycle in 2025.
That said, overall, I continue to favor the Vanguard Growth ETF in 2025. I believe AI is still in its infancy, and AI software could be the next big theme. This could help power a number of growth stocks. Meanwhile, many of the top growth stocks in the Growth ETF are still attractively priced based on their expected growth in 2025. If the AI boom continues, I expect the growth come out on top again in 2025.
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Geoffrey Seiler does not have a position in any of the stocks mentioned. The Motley Fool has positions in and recommends the Apple, Microsoft, Nvidia, Vanguard Index Funds – Vanguard Growth ETF, and the Vanguard Index Funds – Vanguard Value ETF. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
