Every few years, the market trots out the same rivalry like a heavyweight title match: Value vs. Growth. If you’re new to the story, it can look like a brand-new contest—electrifying, unpredictable, maybe even one with a decisive winner just waiting to emerge. But anyone who has watched more than one cycle knows the truth: this isn’t a match, it’s a pendulum. And right now, heading into 2026, that pendulum is at full swing—growth carrying the momentum of the last decade, value trading at one of its largest historical discounts, and investors wondering (once again) which corner of the ring they should stand in when the bell rings next.

The “value” and “growth” labels do get thrown around casually, but the mechanics underneath them are distinct and sometimes opposite approaches to investing. There are also a number of factors that go into the definitions of each, but basically, a value stock is one where the price is lower than its intrinsic value, and a growth stock is one where the price reflects a belief in stronger future expansion in revenues and earnings. If you like, value is priced for what the company is today, while growth is priced for what it might become tomorrow.

A value stock is one that typically has a low price-to-book ratio, like 1, has positive earnings and a relatively low price-to-earnings ratio, and might even pay a dividend. A growth stock, on the other hand, is going to have a higher price-to-book ratio (well north of 2), a higher price-to-earnings ratio (potentially with negative earnings), and will be less likely to distribute dividends to shareholders.

I will get into the recent battle between these two approaches later, but my catalyst for writing this was the announcement by Warren Buffett’s Berkshire Hathaway this week. Warren Buffett, at the ripe old age of 95, is known for being one of the best value investors of our time. He is famous for adages like “Be fearful when others are greedy. Be greedy when others are fearful,” and “Price is what you pay, value is what you get.” Buffett is going to step down as CEO of Berkshire at the end of this year, passing the baton to Greg Abel (a Canadian, no less).

The announcement from Berkshire was that it was taking a sizable stake in Alphabet (parent company of Google). Now, this is not a value stock by any stretch. Earnings are solid, but this week the stock hit a record high of US$ as you can see in the above chart. In fact, the largest company by market cap – Nvidia – has been sliding while Alphabet ascends and the difference between the two is now only about $500 billion.  Considering that this company now trades at a price/book of around 10 and has a P/E ratio of around 30, one wouldn’t consider this a value play for Berkshire. It does have a rival chatbot (Gemini) to ChatGPT and others and is supplying that AI with its own chips. Apple is said to be looking at partnering with this platform. Maybe this shift in Berkshire’s appetite marks a successful juncture as Buffet steps down, or maybe it’s a contrarian indicator. But I digress.

Value investors have had a rough three years, with the MSCI Value index underperforming the MSCI US equity index in all three. If we use the iShares S&P500 Value Index ETF (IVE) against the iShares S&P500 Growth Index ETF (IVW), the latter is up 19.5% this year versus 8.5% for value. Over three years as of October, the growth index is up 111% versus 54%, as seen in the chart below.

Large-cap technology stocks have clearly been a key driver behind this divergence, but investors shouldn’t lose sight of value playing a part in their portfolio – especially when overall valuations for growth stocks are seen as being lofty. Over long periods of time the data has shown that value stocks do tend to outperform growth stocks, although that pattern has broken down over the last decade. One notable exception was 2022, when interest rates began to rise in response to higher inflation. Since growth stock valuation is predicated on future earnings and those earnings have to be discounted back to the present using prevailing rates, the significant increase in bond yields that year was a blow. Still, growth has dominated outside of that episode, and this has caused some investors to abandon value in anticipation of continuing juicy returns from the growth segment.

Our view is that this prolonged period of outperformance by growth over value is likely coming to an end as investors grapple with increased uncertainty from the economy to geopolitics. Falling interest rates would provide a boost to growth stocks, but there is a healthy debate as to where the Federal Reserve is going to steer rates in the coming months and quarters. Then there is growing talk of a bubble in AI and hence large-cap technology stocks. Some may opt to trim back on growth and go to cash, but rotation into value is just as likely in our opinion. Remember that buying a stock that is trading closer to or below its book value, but with decent quality and positive earnings, means that there is potentially more downside protection in a market meltdown.

So, should we just go out there and load up on a bunch of stocks that are trading with a price/book of 1 and call it a day? The short answer is no. As much as the value versus growth decision looks like a pendulum, the reality is that a properly diversified portfolio needs a blend of both, with appropriate tilts depending on fundamentals. There is another reason to adopt a blended approach and that is because some stocks might be incorrectly labeled.

There was an interesting paper published by Professor Stephen Penman of the Columbia Business School entitled “Fundamentals of Value vs. Growth Investing and an Explanation for the Value Trap”*. At its core, Penman argued that the divide between value and growth is often distorted by accounting treatment, particularly the expensing of intangible investment. This makes innovative firms appear more expensive (higher P/E, low earnings) even if their true economic value is greater. He found that technology companies that invested heavily in R&D and software could be mislabeled since intangible assets are recorded as expenses rather than long‑term value creation.

This would tend to depress earnings and create a higher price/earnings ratio.  At the same time, he found that so-called value stocks didn’t also come with reduced risk (volatility) and instead represented a “trap” for investors seeking that cushion of value. Using this approach, stocks like Nvidia may not be a growthy as they seem when simply looking at the standard metrics. Then again, if we treat intangible assets as capital investment, there is the question of how much return do we realistically expect on that investment? The main takeaway from the paper is that value investing is not about low price — it is about price being below economic reality. And growth investing is not about high multiples — it is about markets pricing future earnings expansion.

That said, we view the current market has attaching too high a multiple to growth stocks that have also become overly concentrated. Earlier this week, in my segment on BNN Bloomberg’s The Street, I discussed how Canadian transportation stocks had seen their prices slide in response to tariffs and trade uncertainty, but also from tax-loss harvesting into year-end. As such, I suggested this sector now represented a decent value opportunity for investors seeking strong long-term returns but also a cushion against a potential significant downturn in the general market.

If a tilt towards value doesn’t fully give you a sense of security during the times ahead, then there is always the case for building a cash cushion in the face of this uncertainty. In addition to providing a buffer for the portfolio against short-term volatility, it also gives us an opportunity to take advantage of better valuations for those growth stocks that happen to fall off their thrones. Or as Buffet said – “cash combined with courage in a time of crisis is priceless”.
 

On behalf of the Pyle Wealth Advisory team, have a wonderful weekend.   

Andrew Pyle

* Fundamentals of Value vs. Growth Investing and an Explanation for the Value Trap