Is a rebound in value stocks possible in 2025?

Investors can find more value in value stocks this year.

Over the past two years, growth stocks have risen incredibly, with the Nasdaq up nearly 85% since the end of 2022 to nearly 20,000. Additionally, growth stocks like NVIDIA (NASDAQ:NVDA) have led the S&P 500 higher for the second year in a row. Earn profits of over 20%. This is the first time this has happened since 1998.

The tech- and growth-driven Nasdaq ended 2024 up about 30%, while the S&P 500 was up 23% last year. Most of the gains have come from growth stocks, as the S&P 500 Growth Index is up 35% over the past year, while the S&P 500 Value Index is up just 9.5%.

Add mid-cap into the mix and you’ll find it’s almost one-sided. The Russell 1000 Growth Index is up 32% over the past year, while the Russell 1000 Value Index is up just 12%.

But after two years of incredible growth, should investors be looking for more value?

Growth stocks are overvalued

There has been a lot of talk of the market expanding in 2024, with experts predicting that investors will shift more from expensive large-cap stocks to small-cap stocks. To some extent, that happened as small-cap stocks rebounded in the second half of the year.

However, large-cap valuations still remain high. While the summer’s sell-off caused the S&P 500’s P/E ratio to decline slightly, large-cap stocks soared thanks to the fall rally driven, among other things, by interest rate cuts. As a result, valuations rose again, moving back toward the S&P 500’s P/E of 30.

Although the S&P 500’s negative December has caused valuations to decline slightly, the S&P 500’s P/E as of January 2 is still historically high at 29. Although not as high as in 2021, when it hit 40, the PER is close to its highest since then.

But perhaps a better measure of growth stock valuation is the Nasdaq 100, which is comprised almost entirely of growth stocks. As of December 31, the Nasdaq 100 P/E was 36.68, close to an all-time high of 38.57 for 2021.

Mid-cap stock value surges in the second half of the year

Value stocks will emerge with some momentum in 2025. While their annual returns were minimal compared to growth stocks, value stocks narrowed the gap somewhat in the second half of the year. Over the past six months, the Russell 1000 Growth index has returned 19% compared to 14% for the Russell 1000 Value index.

The gains in the Russell 1000 Value Index fall almost entirely within the mid-cap space. Mid-cap value stocks, as measured by the S&P 400, have returned 21.5% over the past six months, while the S&P 400 Growth Index has returned just 8%. This is a trend that investors should pay attention to.

There are several factors that can help you evaluate stock valuations in 2025. The first, as mentioned earlier, is the extremely high valuation of the S&P 500 and Nasdaq. After two years of big gains, many are well above their historical ranges. This is a red flag for some stocks, especially those that cannot generate commensurate returns. Investors should check the P/E ratio, but they should also look at the 2025 outlook for earnings expectations.

This can trigger a cycle from overvalued stocks to stocks that are undervalued relative to their growth potential. Over the coming weeks, we’ll take a closer look at some value stocks to consider in 2025.

Values ​​to rebound in 2025

Tony DeSpirito, BlackRock’s global chief investment officer for fundamental equities, highlighted several other reasons to increase your value exposure in 2025.

One is simply diversification. The strength of growth stocks has led to them being undervalued in large-cap indices. As of November 30, the proportion of growth stocks in the S&P 500 was 37%, higher than the historical average of 24%.

“This concentration may result in many portfolios lacking diversification and less exposure to value stocks,” DeSpirito wrote in BlackRock’s Q1 2025 report. “Therefore, there is a risk of missing out on potential upside in value appreciation like the one we have seen since July.” I wrote: This is the ‘Take Stock’ newsletter.

The BlackRock CIO also said that a healthy allocation to value stocks can provide “portfolio insulation should market winds change.” For example, when the market crashed in 2022, portfolio losses were offset by value stocks, which typically perform better in recessions.

DeSpirito also noted that the valuation gap between the Russell growth index and the value index is the largest since December 2000. This was almost the beginning of a three-year bear market that lasted until 2002. From that point on in December 2000, value stocks outperformed growth stocks over the next three and five years.

“We believe this means there is ample upside potential if value stocks begin to rise again to historical standards. High growth stock valuations will likely attract investors toward value, especially as the market expands and company fundamentals begin to reward beyond large-cap leaders. Because you can,” DeSpirito said. said.