Growth Stocks Are Trumping Value Once Again

An investor bet that slowing inflation will allow the Federal Reserve to slow its pace of rate increases has underlined the stock rally. The yield on the 10-year Treasury note, which affects everything from auto and student loans to mortgage debt, dropped earlier this year, though it has been climbing again lately. Lower long-term rates have encouraged many to return to the trade that worked for much of the past decade: growth and technology companies. 

“Now investors are starting to recognize that, ‘Hey, there are growth companies out there that are trading at a much more reasonable price,’” said Craig Sarembock, wealth adviser and principal at Bartlett Wealth Management in Cincinnati. 

Mr. Sarembock says he is looking to add to his large-cap growth stocks exposure. 

Among the biggest contributors to the growth index this year are

Apple Inc.,

which has added 18%;

Tesla Inc.,

which has gained 69%; and

Nvidia Corp.

, which has advanced 46%. Those driving the value index are

Walt Disney Co.

, which has risen 21%;

JPMorgan Chase

& Co., which has added 6.1%; and

Exxon Mobil Corp.

, which has increased 0.9%. 

Growth stocks are typically companies that promise to deliver faster-than-average profit growth in the future. The last time growth stocks were beating value stocks by a wider margin to start a year was in 2020, when major stock indexes surged in January and February before crashing at the start of the Covid-19 pandemic.

Led by megacap technology companies, growth shares powered major indexes to dozens of highs in the years after the 2008 financial crisis. Value stocks—which often include shares of banks, oil companies and industrial conglomerates—lagged behind. 

Market conditions changed last year. The Fed aggressively raised interest rates to tame inflation, rattling everything from stocks to bonds and gold. The growth index, which is particularly vulnerable to higher interest rates, fell 30%. Meanwhile, the value index was down a more modest 10%, with nervous investors piling into shares of companies known for their steady cash-flow generation. 

Investors taking a more cautious approach are already questioning how much longer growth’s day in the sun can last.

A string of stronger-than-expected economic data over the past two weeks has sapped some of the stock market’s recent momentum. Both consumer prices and producer prices rose more than expected in January. Retail sales posted their biggest monthly gain in nearly two years. The labor market has remained robust.

Some investors now fear the Fed may have to keep raising interest rates and hold them there for longer than anticipated. Two Fed officials—Cleveland Fed President

Loretta Mester

and St. Louis Fed President

James Bullard

—said they would have supported raising interest rates by a half percentage point at the central bank’s meeting earlier this month. 

Higher rates would likely lead to more pain for markets—and growth stocks in particular. Plus, valuations are still elevated in many sectors.

“It was a very punishing 2022, so I characterize the rally as mostly a snapback,” Yung-Yu Ma, chief investment strategist at BMO Wealth Management, said of growth stocks. 

Mr. Ma said he expects value stocks to outperform growth stocks over the next few years. He points specifically to their lower valuations and prospects of higher profits.

The Russell 3000 Growth Index is trading at about 21.5 times its expected earnings over the next 12 months, according to FTSE Russell data, while the Russell 3000 Value Index trades at around 14.3 times earnings. In comparison, the S&P 500’s multiple is roughly 18.4.

If the Fed is forced to continue raising rates, leading to a harsh recession, that could make defensive stocks shine yet again, said Peter Cardillo, chief market economist at Spartan Capital Securities in New York. 

Mr. Cardillo said he expects a mild recession this year, but added “if it is a steep recession, then everybody suffers, but there’s always a bright spot in the market.”

Write to Hardika Singh at hardika.singh@wsj.com