Growth vs Value Cycles

Value investing buys cheap companies relative to fundamentals — low price-to-earnings, low price-to-book — betting the market has been too pessimistic; growth investing buys companies expected to grow fast, often paying a high multiple for that expected future growth. Over any single multi-year stretch, one style tends to dramatically outperform the other, and which one wins flips back and forth over time rather than settling permanently in favor of either.

The rotation is closely tied to interest rates and the economic cycle. Growth stocks' value depends heavily on earnings expected many years in the future, so their present value is more sensitive to changes in the discount rate — falling rates disproportionately boost growth stock valuations, and rising rates disproportionately hurt them. Value stocks tend to do relatively better when rates are rising and the economy is recovering, since their near-term earnings matter more than a distant growth story and cheap cyclical businesses benefit most directly from an improving economy. Periods of unusually loose monetary policy and low rates, like the 2010s, have historically favored growth for years at a time, while value has come back strongly in sharper, shorter bursts, often coinciding with rate hikes or recoveries out of a downturn.

For a portfolio manager, this means a pure value or pure growth tilt can underperform the broad market for years without the underlying strategy being "broken" — it's simply the wrong phase of a rotation that has, historically, always eventually turned.