Did growth beat value in 2025?

And what should investors expect in 2026?

For the first part of 2025, value stocks were outperforming growth stocks. Investors came into 2025 wary of high valuations after two straight years of huge returns for mostly growth and tech stocks.

As a result, there was a rotation out of overvalued large cap growth names into value, smaller caps, and more stable investments.

But in the second half of the year, after markets bottomed out in April from the announcement of tariffs, investors began buying back into now cheaper growth and tech stocks, and it led to a surge that lifted the Nasdaq to a 20% gain for the year.

So, ultimately, growth beat value in 2025 – across the board. Here are the returns, based on the performance of iShares ETFs that track these indexes.

• S&P 500 Growth – 19.9%.
• S&P 500 Value – 12.3%.
• Russell 1000 Growth – 16.3%.
• Russell 1000 Value – 15.1%.
• Russell 2000 Growth – 13.0%.
• Russell 2000 Value – 11.9%.
• S&P 400 Midcap Growth – 8.1%.
• S&P 400 Midcap Value – 7.8%.

The results show that the performance was fairly close within the small cap and mid cap stock universes, with growth posting slightly better returns. But there was a sizable gap between large cap growth and large cap value, with growth winning by a wide margin.

Will value flip the script in 2026?

As we enter 2026, markets are in a similar place as they were last year at this time. The second half surge boosted valuations once again and now there are again concerns about overvalued tech and growth stocks.

According to Guru Focus, the P/E ratio of the S&P 500 is back to around 29, which is near where it was at the start of 2025. That’s higher than normal, but significantly lower than the P/E ratio of 41 during the 2021 tech bubble.

The P/E ratio of the Nasdaq 100 is about 34, which is also elevated. However it was near 39 in early 2025, so its not as high as it was last year.

More concerning is the Cyclically Adjusted PE Ratio (CAPE Ratio), also known as the Shiller PE Ratio, which measures the price to earnings ratio based on average inflation-adjusted earnings from the previous 10 years. The CAPE ratio is at 40, which is higher than 2021 when the bubble burst. The only point in recent history when it was higher was the dotcom boom in 1999 when it hit 44. That bears watching, as it takes a longer term view of valuations as opposed to the trailing 12 months.

Many pundits anticipate more muted returns in 2026, with the predictions for the S&P 500 ranging from 8,100 on the high side, a 17% return, to 7,100 on the low side, a 2% return. But most projections fall somewhere in the middle.

AI boom broadens out to value stocks

JP Morgan targets the S&P 500 at 7,500, citing the continuation of the AI supercycle, which will drive capex spending and earnings.

Vanguard also anticipates AI driving earnings, but it sees the benefits broadening out to value stocks in this next cycle. That is one reason why Vanguard is more bullish on the prospects for value and international stocks over the next 5 or 10 years while tech stocks should lag.

“The heady expectations for U.S. technology stocks are unlikely to be met for at least two reasons,” Joe Davis, Vanguard’s global chief economist, stated back in November. “The first is the already-high earnings expectations, and the second is the typical underestimation of creative destruction from new entrants into the sector, which erodes aggregate profitability. Volatility in this sector—and hence the U.S. stock market overall— is very likely to increase.”

It is very hard to predict where the larger markets will go, but investors should be very mindful of valuations for individual stocks they invest in or are considering. If the P/E ratios are well above historical averages, investors should be cautious and do a deeper dive into why.