The Case for Deep Value Investing in a Growth-Dominated Market

The past five years have been a rollercoaster for investors navigating the tug-of-war between growth and value strategies. From 2020 to 2024, growth stocks—led by megacap technology firms—dominated global markets, driven by low interest rates and a surge in speculative investing. However, the macroeconomic landscape has shifted dramatically in 2025. Rising inflation, higher-for-longer interest rates, and a rotation into cyclicals have reignited interest in value investing. This article argues that deep value investing, characterized by rigorous stock selection and valuation discipline, offers a compelling case in today’s market, even as growth stocks retain their long-term allure.

The Resurgence of Value in a Higher-Rate World

Value stocks have historically thrived in environments of rising interest rates and inflation. As noted by a report from J.P. Morgan, value strategies outperformed growth in January 2025, with the Morningstar US Value Index gaining 4.5% compared to 3.9% for its growth counterpart [2]. This reversal follows a 13-year anomaly (2007–2020) during which value stocks languished, but the tide has turned as central banks pivot toward tighter monetary policy.

The MSCI EAFE Value Index, which is over-weight in financials and under-weight in technology, has benefited from this shift. Financials, in particular, have re-rated as higher interest rates expand net interest margins, while energy and industrials have gained traction amid inflationary pressures [1]. For instance, Japanese banks—long undervalued—have seen renewed investor interest as yield-seeking capital flows into sectors that can capitalize on higher rates.

Strategic Stock Selection: Beyond Traditional Metrics

Deep value investing, as defined by GMO, goes beyond simplistic screens for low price-to-earnings (P/E) or price-to-book (P/B) ratios. Instead, it emphasizes a granular analysis of a company’s fundamentals, including earnings quality, balance sheet strength, and long-term growth potential [1]. This approach has proven resilient in recent years, with GMO’s U.S. and International Opportunistic Value Strategies outperforming benchmarks by focusing on the cheapest 20% of the market.

Consider Lincoln National Corp. (LNC) and SM Energy Company (SM), two deep value stocks highlighted in 2025. LNC trades at a forward P/E of 4.6 and a P/B of 0.8, while SM has a forward P/E of 4.1 and a robust dividend yield [5]. These metrics, combined with strong cash flows and sector-specific tailwinds (e.g., insurance and energy), exemplify the power of disciplined valuation. Similarly, the Miller Deep Value Select Strategy, which targets overlooked small-cap and out-of-favor sectors, delivered strong returns in 2024 despite a growth-dominated market [4].

The Long-Term Edge of Growth vs. the Cyclical Nature of Value

While value stocks have surged in early 2025, historical data underscores the enduring strength of growth investing. As per Morningstar, growth stocks have outperformed value in 14 of the last 20 years, driven by secular trends like digital transformation and low borrowing costs [2]. However, this long-term dominance masks cyclical corrections. The 2007–2020 period was an outlier, and valuations for growth stocks—many of which trade at multiples exceeding 40x earnings—have become increasingly fragile as interest rates rise [3].

The key for investors lies in balancing strategic stock selection with macroeconomic awareness. Deep value strategies, which prioritize companies with durable competitive advantages and attractive valuations, are better positioned to weather volatility. For example, Warren Buffett’s focus on companies like Coca-Cola and American Express—both of which trade at reasonable multiples relative to their earnings stability—demonstrates the power of combining valuation discipline with long-term thinking [3].

Conclusion: A Case for Prudence in a Shifting Landscape

The current market environment presents a unique opportunity for deep value investors. While growth stocks remain popular for their innovation-driven narratives, the higher-for-longer rate regime favors companies with stable cash flows and low valuations. By adhering to rigorous stock selection and valuation discipline—whether through strategies like GMO’s deep value approach or sector-specific bets on financials and energy—investors can capitalize on mispricings that arise in growth-dominated markets.

As central banks navigate the delicate balance between inflation control and economic growth, the pendulum may swing back toward value. For those with the patience to identify undervalued opportunities, the rewards could be substantial.

Source:
[1] The Rhythm of Style: Value vs. Growth in Developed International Markets [https://www.wisdomtree.com/investments/blog/2025/04/01/the-rhythm-of-style-value-vs-growth-in-developed-international-markets-part-1]
[2] Value Stocks Lead to Start 2025, but Growth Retains Its Long-Term Advantage [https://www.morningstar.com/markets/value-stocks-lead-start-2025-growth-retains-its-long-term-advantage]
[3] Value vs growth investing: A historical overview [https://am.jpmorgan.com/ch/en/asset-management/adv/insights/value-vs-growth-investing]
[4] Is this a Generational Opportunity? [https://millervalue.com/is-this-a-generational-opportunity/]
[5] Is SM Energy Company (SM) the Deep Value Stock to Buy Now? [https://finance.yahoo.com/news/sm-energy-company-sm-deep-021128153.html]