Growth vs value investing: styles, P/E and the long record

Investors often sort stocks into two broad styles. Growth stocks belong to companies whose sales and earnings are expected to rise much faster than the economy, and investors pay high prices relative to today's profits for that future. Value stocks trade at low prices relative to their current earnings, assets or dividends, often because the business is mature, out of favor, or facing doubts.

Neither style is better by definition. They are two different bets about the gap between price and future results. This guide explains how each style is defined and measured, how index providers sort stocks into the two camps, how to read the valuation ratios behind the labels, and what more than two decades of real data on two large style funds show, including the long stretches when each one led.

What makes a stock "growth" or "value"

A growth stock typically has:

• Revenue and earnings growing well above the market average.
• A high P/E ratio, because the price reflects profits expected years from now.
• Little or no dividend, since cash is reinvested in expansion.
• A larger share of its value tied to the distant future, which makes it sensitive to changes in interest rates and expectations.

A value stock typically has:

• A low P/E, price-to-book or price-to-sales ratio compared with the market or its peers.
• Slower, steadier growth, often in mature industries such as banks, energy, industrials or consumer staples.
• A higher dividend yield.
• Some reason the market is skeptical: cyclical earnings, competition, debt or a recent disappointment.

Many companies sit in between. Index providers usually allow a stock to be split across both styles or to fall in a "blend" middle.

The ratios behind the labels

Price-to-earnings (P/E) compares the share price with earnings per share (EPS):

That example shows the core tradeoff. Growth investing depends on the growth actually arriving. Value investing depends on a low price being an overreaction rather than an accurate warning.

Other common measures:

• Price-to-book (P/B): price relative to the accounting value of the company's net assets. Useful for banks and asset-heavy firms; less meaningful for software companies whose main assets are intangible.
• Price-to-sales (P/S): used when earnings are small or negative.
• Dividend yield: annual dividends ÷ price. Higher yields usually indicate value.
• PEG ratio: P/E divided by expected earnings growth (in percent). A rough way to compare growth companies.

How style indexes sort stocks

Fund families don't pick growth and value stocks by judgment. They follow index rules. Vanguard's Growth ETF (VUG) and Value ETF (VTV), for example, track the CRSP US Large Cap Growth and Value indexes, which score each large US company on several growth factors (such as historical and forecast earnings growth) and value factors (such as book-to-price and earnings-to-price) and assign it to growth, value, or partly to each. Other providers such as Russell and S&P use similar multi-factor methods with different details, so the same company can be "growth" in one index and partly "value" in another.

The practical consequence: a style fund's holdings change as prices change. A fast-rising growth stock stays in the growth index; a value stock whose price jumps may migrate out of the value index. Style funds also tend to be concentrated by sector. Growth indexes have been heavy in technology and communication services; value indexes in financials, health care, energy and industrials.

Two decades of growth and value, on real data

In Finabase's data, $100 of VUG at the February 2004 monthly close grew to about $1,051 by October 29, 2026, while $100 of VTV grew to about $453. That is about 10.9% a year for growth and 6.9% for value over 22.7 years, measured on price alone.

The comparison flatters growth somewhat. Value funds pay higher dividends, which a price-only chart leaves out, so including reinvested dividends would narrow the gap. It also hides how uneven the path was:

• Volatility of monthly returns was about 16.5% a year for VUG and 14.5% for VTV.
• Maximum drawdown on monthly closes was 48% for VUG (October 2007 to February 2009) and 57% for VTV (May 2007 to February 2009). Value, full of banks, fell further in the financial crisis.

Year by year, the gap swings widely:

2022 is the clearest lesson. As interest rates rose sharply, the high valuations of growth stocks fell hardest, because profits expected far in the future are worth less when rates are higher. Value, with more of its worth in current earnings, fell far less. The following year reversed it.

Growth and value compared

Pitfalls for each style

The growth trap. A great company can be a poor investment at the wrong price. If a stock already prices in years of rapid growth, merely good results can send it down. Expectations, not quality alone, drive returns.

The value trap. A stock can look cheap because its earnings are about to shrink. A low P/E on last year's profits means little if next year's profits fall by half. Check why the market is pessimistic before assuming it's wrong.

Style drift and overlap. Owning a growth fund plus a handful of popular tech stocks can double up the same exposure. Look at the holdings, not just the label.

Chasing the recent winner. Because leadership rotates, investors who switch to whichever style just had a great run often buy near the end of it.

How Finabase helps

The screener has ready-made screens such as low P/E large caps and high dividend yield, two common starting points for value-style research, and the screen builder lets you set your own valuation and growth criteria. Each symbol's valuation tab shows up to ten fiscal years of valuation multiples, profitability and growth history alongside financial-health scores, so you can see whether a stock is cheap or expensive relative to its own past. The symbol comparison tab puts two or more symbols, such as VUG and VTV, on the same chart.

Frequently asked questions

Is growth or value investing better?

Neither has been better in every period. Since 2004 large-cap growth funds have beaten large-cap value funds on price, but value led in several years, including by about 29 points in 2022, and studies of earlier decades found the opposite overall pattern.

What P/E ratio counts as a value stock?

There is no fixed cutoff. Value is relative: a stock is usually considered value-priced when its P/E, price-to-book or price-to-sales is low compared with the market, its sector or its own history.

Why do growth stocks fall more when interest rates rise?

Much of a growth company's value comes from profits expected many years ahead. Higher interest rates reduce what those distant profits are worth today, so growth stocks' prices tend to be more sensitive to rate changes.

Can a stock be both growth and value?

Yes. Many index providers split some companies between their growth and value indexes, and a company can move between styles as its price and growth rate change.

Summary

Growth and value are two ways of looking at the gap between a stock's price and the business behind it. Growth investors pay high multiples for rapid future expansion; value investors buy businesses that look cheap on today's earnings, assets or dividends. Index providers sort stocks with ratio-based rules, and the two styles take turns leading, sometimes for years. Over 2004–2026, VUG beat VTV on price by about four points a year, yet value led sharply in 2022. Understanding what each style needs to go right, and what can go wrong, matters more than picking a permanent side.