After moving way behind value stocks in Q1, growth stocks have seen a historic rebound. Given the back-and-forth action this year, how should investors approach the value versus growth debate?
Last quarter was quietly one of the best periods for value stocks the market has ever seen. The Vanguard Value ETF (VTV) outperformed the Vanguard Growth ETF (VUG) by 13.2% in Q1, marking the second-widest spread in favor of value since 2002. However, the gap between the two funds has narrowed almost entirely over the past month as growth areas of the market reclaimed the driver’s seat. VUG was down as much as 13.9% earlier this year, but the fund has since rallied back into a column of X’s, returning to a buy signal over the past two weeks. While the fund faces resistance near its all‑time highs at $84, the overall technical picture has returned to constructive territory, supported by a 4.21 fund score.
The rebound in growth stocks has been even more notable on a relative basis, with VUG’s performance looking even more incredible when compared to VTV. One of the most consistent signals for determining whether to favor growth or value has been the RS chart between VUG and VTV. Historically, allocating to whichever fund has been on an RS buy signal has outperformed holding either fund individually. VUG has demonstrated long‑term relative strength versus the value fund since 2023, though it temporarily lost near‑term relative strength after moving into a column of O’s earlier this year. However, recent action in favor of VUG has seen the RS chart reverse back into a column of X’s, indicating that growth is once again favored in both the near- and long-term.
The resurgence in growth has also been notable for the speed of the rebound. Over just the past month, VUG is outperforming VTV by 12.2%. There have only been fifteen other instances in which VUG has outpaced VTV by double digits during the prior month, excluding clusters within a month. Across those historical instances, market performance was generally strong, with both VUG and VTV averaging roughly a 10% one‑year return. However, these instances occurred disproportionately during periods of heightened volatility, with a wide dispersion of returns. Value stocks were more consistent in generating upside, with VTV posting positive returns 80% of the time one year later, compared to 67% for VUG. However, growth stocks exhibited significantly greater upside potential, albeit with increased downside risk. When VUG was positive after a year, it produced an average return nearly double that of value stocks, gaining 28.7%. Conversely, when VUG was negative after a year, it averaged a decline of 25.7%, compared with just 3.9% for value.
If market conditions begin to deteriorate, investors should approach growth allocations with added caution given their higher levels of volatility. However, the base case for the market continues to support the view that it remains in a bull market. Growth areas continue to lead in relative strength with few signs of slowing, while risk‑on sectors such as technology are leading the way to the upside. The weight of the evidence continues to cast a favorable light on domestic equities, especially among growth areas, suggesting they should remain an area of emphasis within portfolios until clear signs of change emerge.
