Buying cheap assets and selling them at a higher price is what investing is all about, but the growth vs. value debate continues.
Value stocks have been known to outperform in the early stages of economic and market cycles, when bond yields rise.
The decades-long downtrend in bond yields is finally over, and it’s expected value investing will enjoy a renaissance.
Who can argue that value investing doesn’t make sense? Buying cheap assets and selling them at a higher price is what investing is all about.
But the debate continues over value versus growth stocks. There are many ways to identify which assets are likely to rise in value and they don’t necessarily involve buying the cheapest assets.
History has shown that different styles might outperform depending on market conditions. Traditionally when bond yields fall, growth stocks have performed well, while value stocks have been known to outperform in the early stages of economic and market cycles (when bond yields rise).
So, where are we now? I believe the decades long downtrend in bond yields (and outperformance of growth stocks) is over, which could favour value stocks. But let’s look at history first.
When I started my career in the mid-1980s, it was easy to prefer assets that were selling at low valuation multiples. Back tests suggested that value investing had produced higher returns than other methods, such as favouring growth.
Things started to go wrong for value investors, however, in the second half of the 1990s when the internet bubble drove technology and other growth stocks to unsustainable levels. The bubble eventually burst, of course, but careers were ruined among value investors who were relieved of their duties before they were proved right.
Unfortunately, value then went on to underperform growth for much of the post-GFC era. Casual observation suggests that falling bond yields were an important part of that process. In theory, the lower the prevailing bond yield, the lower the discount factor applied to future earnings and dividends. By contrast, the higher the premium applied to growth. (Growth stocks are long-duration instruments, with an above-average share of value contained in the distant future). As bond yields trended lower from the early 1980s to 2020, it should have been no surprise that growth investing rose in popularity at the expense of value.
Those working in the financial industry since the start of this century may have been forgiven for believing that bond yields would always fall and that growth stocks would always outperform. We’ve now seen that bond yields can rise (and sharply), and 2022 showed that the value factor can outperform growth and other factors. I believe that bond yields have now largely normalised, and expect something approaching normal cyclical variation.
Hence, I expect a more level playing field between growth and value than we’ve seen over recent decades. Some phases of the economic cycle will favour growth, and some will favour value. We find that value typically outperforms other factors at the start of an economic and market cycle.
Interestingly, and despite the intense focus on AI-related stocks, our value factor indexes have outperformed growth in both the US and Europe in 2025. Indeed, among our factor indexes for the US, value was the best performer (as of 5 December 2025). In Europe, it was only outperformed by price momentum. This fits with our observation that the best-performing global sectors during 2025 have been basic resources and banks.
Even better, we expect economies to accelerate during 2026, helped by rising real incomes in many, recent and future central bank easing, and fiscal expansion in some countries. Remember that we find that the value factor tends to perform best in the early stages of economic and market upswings. We consider that it includes the sort of mid-cycle upswing that we expect in 2026.
Finally, though we expect some central banks to continue easing, we suspect that long bond yields may rise, especially in the US. This could penalise growth stocks.
The normalisation of interest rates and bond yields in 2021 and 2022, and the ending of the decades-long downtrend, could level the playing field between growth and value over the coming economic cycles, in my opinion. Hence, investors may need to adjust to a situation where growth no longer outperforms value on a trend basis but outperforms only sporadically. This could be a painful disappointment for growth over a number of years, as higher hurdle rates of return have their effect. In the meantime, value may positively surprise previously sceptical investors. I don’t imagine this will be a straight-line process. I’d expect value to be strongest in the early stages of economic and market cycles and to outperform growth, in particular, when bond yields are rising, which is often in recovery phases.
In conclusion, I’m a strong believer that the major determinant to returns in a portfolio is the price paid for the assets. (Buy low/sell high!) Hence, I’m temperamentally a value investor and believe that the decades-long downtrend in bond yields is finally over. This suggests the permanent tailwind for growth stocks is a thing of the past. As growth stocks adjust to that new reality, I expect value investing to continue enjoying a renaissance.
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