Growth vs. Value: Capturing Complementary Factor Exposure

The U.S. equity market has entered a new phase of concentration, dominated by momentum-driven, high-beta stocks like the "Magnificent Seven." This shift has left traditional value strategies struggling to find relevance, while growth stocks-particularly those in artificial intelligence and semiconductors-have surged to valuation extremes. Yet, as macroeconomic uncertainties loom and market cycles inevitably shift, investors may find themselves regretting a one-sided bet on growth. The solution? A balanced approach that blends value and growth factors through strategies like GARP (Growth at a Reasonable Price) to enhance risk-adjusted returns and adaptability across market cycles.

The Dominance of Growth and the Risks of Concentration

Since 2020, growth stocks have outperformed value in nearly every major time frame. The S&P 500 Growth Index, tracked by the Vanguard S&P 500 Growth ETF (VOOG), has delivered an annualized return of 17.09% over the past decade, compared to 11.63% for the Vanguard S&P 500 Value ETF (VOOV) Optimized Portfolio. This gap widened in 2023–2024, with VOOG returning 32.08% in 2024 versus VOOV's 9.06% Total Real Returns. The disparity is driven by sector allocations: VOOG is 55.40% concentrated in technology, while VOOV has just 10.40% in the same sector Optimized Portfolio.

However, this concentration comes at a cost. The "Magnificent Seven" now account for over 30% of the S&P 500's market cap, with valuations that defy historical norms. For example, NVIDIA-a poster child of the AI boom-has surged 32.4% year-to-date in 2025 Yahoo Finance, yet its price-to-earnings ratio exceeds 60x, raising questions about sustainability. Meanwhile, value stocks-often in sectors like industrials and healthcare-trade at attractive valuations but lack the narrative-driven hype of their growth counterparts.

The Case for Blended Strategies: GARP as a Middle Ground

GARP strategies aim to bridge the gap between value and growth by targeting companies with durable earnings growth and reasonable valuations. While pure value strategies focus on low price-to-book ratios and pure growth strategies chase high earnings momentum, GARP investors seek a balance. This approach has historically delivered strong risk-adjusted returns, particularly during market corrections. For instance, in January 2025, the Morningstar US Value Index outperformed the Growth Index by 0.6 percentage points (4.5% vs. 3.9%) Morningstar, signaling a potential inflection point for value.

Academic research underscores GARP's adaptability. A 2025 T. Rowe Price analysis notes that while GARP has lagged in recent years due to momentum-driven regimes, it remains a "source of ballast and compounding returns" during market shifts T. Rowe Price. This is because GARP stocks-often in sectors like healthcare and industrials-offer steady cash flows and earnings visibility, which become critical during periods of macroeconomic stress.

De-Correlation and Portfolio Resilience

One of the key advantages of blended strategies is their ability to reduce portfolio correlation. VOOG and VOOV, despite their distinct sector allocations, are highly correlated (0.75), meaning they tend to move in tandem Optimized Portfolio. This limits diversification benefits, especially during downturns. In contrast, a GARP ETF-such as one tracking the MSCI USA Quality GARP Index-could offer lower correlation with both pure value and growth strategies. While direct de-correlation metrics are not available for 2023–2025, the GARP ETF's strong alignment with growth-oriented tickers like KLAC (80% correlation) suggests it retains some growth characteristics but with value-like discipline Tickeron.

Sector exposure further highlights this balance. A GARP portfolio might include companies like Ralph Lauren or Howmet Aerospace, which combine earnings growth with reasonable valuations Yahoo Finance, whereas VOOG is overwhelmingly tilted toward tech. This diversification across sectors and styles can mitigate the risks of overexposure to a single narrative.

Strategic Implications for Investors

For investors seeking resilience, the lesson is clear: a portfolio that blends value and growth factors can adapt to shifting market conditions. During growth-led bull markets, GARP strategies may underperform pure growth but avoid the valuation extremes that often precede corrections. Conversely, in value-favorable environments-such as the early 2025 market-GARP can outperform pure value by capturing durable earnings momentum.

The challenge lies in implementation. While ETFs like VOOV and VOOG offer pure-play exposure, they lack the de-correlation needed for true diversification. A blended approach-whether through a GARP ETF or a custom portfolio-can address this gap. As the market grapples with AI-driven speculation and macroeconomic headwinds, the ability to pivot between value and growth will become increasingly valuable.

Conclusion

The current market environment favors growth, but history reminds us that no factor dominates forever. By embracing blended strategies like GARP, investors can build portfolios that thrive in both growth-led and value-led cycles. The key is to balance momentum with valuation discipline, ensuring that today's speculative bets don't become tomorrow's overhangs. As the S&P 500's concentration risks mount, the case for complementary factor exposure has never been stronger.