After a decade of growth outperforming value, 2022 was a victory for value-oriented investors. Yet with growth stocks producing double-digit returns in the first half of 2023, is the value rally over?

After a decade of growth outperforming value, 2022 was a victory for value-oriented investors, with value (as measured by the MSCI World Value Index) declining only 6.52% while growth (as measured by the MSCI World Growth Index) declined 29.21%, more than 20 percentage points of outperformance for value in just one year (source: Morningstar Direct, in USD).

Following those gains, you might ask yourself if the value rally is over. If the first half of 2023 was any way to judge, it looked like it. Growth produced double-digit returns (27.09%) while value produced much smaller gains for the first half (3.98%). But if you look under the hood, many of those gains in growth stocks were driven by just a handful of stocks. Names like Apple (up 49%), Microsoft (up 43%), Nvidia (up 190%), and Tesla (up 119%) were among the biggest winners for the first half (source: FactSet), all of which are considered growth companies.

Investors who think we are in a go-go growth environment again should proceed with caution. Vanguard’s proprietary model for U.S. equities shows a much greater likelihood that value stocks will outperform growth stocks over the next decade (see Figure 3). A year ago, relative valuation would have been a key factor. But with the correction in 2022, our outlook is based more on the long-standing value premium. An environment with higher inflation and higher interest rates is more supportive to value stocks and should allow the value premium to return inflation prints back to target levels showing earlier signs of progress relative to that of the U.S.

Figure 3. How value is projected to outperform growth on a relative basis

Sources: Vanguard calculations as of 31 March 2023, based on data from FactSet, the U.S. Bureau of Labor Statistics, the Federal Reserve Board, Refinitiv, and Global Financial Data.

IMPORTANT: The projections are for U.S. stocks in USD. The projections and other information generated by the Vanguard Capital Markets Model (VCMM ) regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from VCMM are derived from 10,000 simulations for each modelled asset class. Simulations as of March 31, 2023. Results from the model may vary with each use and over time. For more information, please see the Notes section.

Notes: Returns are calculated based on modelled reversion to fair value and projection of fair-value ratio of price/book.

Vanguard Australia