The recent stagnation in growth stocks stands in sharp contrast to the market leadership they displayed over the past several years. With recent movement, is it time to dump value stocks or should investors be patient for a rebound?
Some market relationships are worth monitoring regardless of the broader environment, and few are more important than the dynamic between value and growth. Earlier this year, we noted early signs that momentum was shifting toward value‑oriented areas, and since then the trend has continued to strengthen. With recent movement, is it time to dump value stocks or should investors be patient for a rebound?
The recent stagnation in growth stocks stands in sharp contrast to the market leadership they displayed over the past several years. The Vanguard Growth ETF (VUG) is approaching correction territory, trading roughly 10% below its October highs. The fund is now on a streak of four consecutive sell signals, with it now sitting just above its bullish support line at $445. Movement lower would bring it to a negative trend for the first time since last year’s tariff tantrum. This decline has also weakened its relative strength, with VUG’s fund score falling nearly two points to 3.81. Value stocks, by contrast, have been trending decisively higher. Looking at the Vanguard Value ETF (VTV), it has been trading in the same column of Xs dating back to April of last year. As a result of its upside this year, its fund of 4.11 finally surpassed VUG, marking another noticeable shift in leadership from the last several years.
Evaluating growth stocks and value stocks individually can give insight into which group is in favor, but we can gain further context by looking at the relationship between the two. Specifically, the relative strength chart between VUG and VTV is among the most important indicators of market leadership. Historically, following whichever fund holds an RS buy signal has outperformed owning either fund individually, underscoring the importance of the relationship. Growth has displayed long-term strength over value on the chart since 2023, but action at the start of the year saw VTV regain near-term strength. Since that reversal, the market has moved even more in favor of value, leaving VTV just two boxes away from overtaking VUG's long-term strength for just the third time in the chart’s history.
Additionally, it hasn’t just been the largest names driving the discrepancy between growth and value. Broad participation across domestic equities remains at acceptable levels, but value stocks are contributing to the upside at a meaningfully higher rate than growth stocks. Specifically, the percentage of large cap growth stocks trading in a positive trend (^PTLCG) sits at a respectable 56%, but tis hovering around its lowest levels since May. However, the positive percentage for large cap value stocks (^PTLCV) is in a different stratosphere, with 78% of the group trading in a positive trend, underscoring the abnormally strong participation from value stocks. While the rebound in value stocks has been impressive, participation readings for the group are also in abnormally elevated territory. For reference, the last time ^PTLCV matched our current levels was almost two decades ago. A reversal in ^PTLCV from here would suggest value may be due for a near‑term cooling period, as the market has historically been unable to sustain such elevated readings for long.
While anecdotal, recent action resembles the pattern seen in growth stocks at the beginning of last year, when VUG also recorded four consecutive sell signals. In hindsight, we know that growth eventually rebounded as the Tariff Tantrum unwound, but where the cards will fall this time still has yet to be seen. While growth holds the lead in long-term strength, the market has certainly seen initial signs of change, with value holding a better near-term outlook, making the relationship one to keep an eye on in the coming months.
