Value Stocks Surge 3% While Growth Falls 2.4%: What’s Next?

The sharp 3% surge in value stocks in November, juxtaposed against a 2.4% decline in growth stocks, signals a potential rotation driven by shifting interest rate expectations and resilient economic data, compelling investors to re-evaluate portfolio allocations.

The financial landscape underwent a significant factor rotation in November 2024, characterized by a decisive outperformance of defensive and cyclical assets. Specifically, the Russell 1000 Value Index climbed approximately 3.0%, while the Russell 1000 Growth Index simultaneously dropped 2.4%. This performance disparity, totaling a 5.4 percentage point swing, represents one of the most pronounced monthly divergences observed in the last two years, challenging the long-standing dominance of technology and high-multiple stocks. Investors are now critically asking: is this a temporary fluctuation, or the beginning of a sustained shift toward value growth divergence?

Decoding the November rotation: interest rates and economic resilience

The primary catalyst for the dramatic November factor rotation was the sudden repricing of interest rate expectations coupled with increasingly robust data suggesting a U.S. economic soft landing. Throughout October, market participants had aggressively priced in multiple Federal Reserve interest rate cuts for 2025, driven by moderating inflation figures. However, stronger-than-expected labor market data released early in November—including a non-farm payroll increase exceeding 200,000—prompted a hawkish recalibration. The 10-year Treasury yield, which had briefly dipped below 4.5%, reversed course, settling near 4.75% by month-end, according to Treasury Department data. This movement directly impacts the relative attractiveness of value versus growth.

Growth stocks, often characterized by high expected earnings far into the future, are inherently more sensitive to changes in the discount rate. When the risk-free rate (proxied by Treasury yields) rises, the present value of those distant earnings declines sharply, putting downward pressure on valuations—especially for companies with high price-to-earnings (P/E) ratios or those not yet profitable. Conversely, value stocks, typically represented by mature companies in sectors like energy, financials, and industrials, derive most of their value from near-term cash flows and dividends, making them less susceptible to discount rate fluctuations. Furthermore, these cyclical sectors benefit disproportionately from sustained economic activity, which the November data confirmed.

The impact of rising real yields on high-duration assets

Real yields—nominal Treasury yields minus inflation expectations—are a critical metric for valuing growth companies. When real yields climb, the cost of capital increases, making corporate borrowing more expensive and dampening future growth projections. During November, the real 10-year yield rose by approximately 25 basis points (bps), according to Federal Reserve Bank of St. Louis data. This increase acted as a direct headwind for the technology-heavy growth index.

• Discount Rate Sensitivity: High-duration growth stocks saw their intrinsic valuations compressed as the market priced in higher ‘for longer’ rates, reflecting the Fed’s commitment to achieving its 2% inflation target.
• Financial Sector Benefit: Value-oriented financial institutions, particularly regional banks, benefited from the steeper yield curve, which typically allows them to earn a wider net interest margin (NIM) on their lending activities.
• Energy Sector Outperformance: Robust global demand forecasts and stable oil prices (WTI hovering near $78 per barrel) propelled energy stocks, which are core components of the value growth divergence index.

This dynamic highlights a fundamental truism of market cycles: sustained economic strength, particularly when accompanied by sticky inflation that forces the Fed to maintain restrictive policy, creates a challenging environment for speculative growth and favors companies with strong, current free cash flow and lower debt burdens. The November shift suggests that the market is moving away from the ‘hope trade’ associated with imminent rate cuts and towards a ‘reality trade’ based on current operating profitability.

Sector performance breakdown: financials and energy lead the charge

The 3% gain in value stocks was not evenly distributed but concentrated in specific cyclical and defensive sectors. The Financials Select Sector SPDR Fund (XLF) rose over 4.5% in November, marking its best monthly performance since Q1 2023, driven by improved net interest margin forecasts. Similarly, the Energy Select Sector SPDR Fund (XLE) advanced 5.2%, benefiting from stable commodity prices and disciplined capital expenditure by major integrated oil companies.

Conversely, the decline in the growth index was largely attributable to weakness in high-profile technology names and certain consumer discretionary components. Several mega-cap technology stocks, which dominate the growth index, faced pressure as regulatory scrutiny intensified and investors began rotating capital toward less crowded trades. According to FactSet data, the collective P/E ratio of the top five growth stocks remains near 35x forward earnings, significantly higher than the 14x forward P/E ratio observed for the bottom-quartile value stocks, illustrating the vast valuation gap that the November rotation attempted to correct.

The resilience of industrial and materials sectors

Industrial stocks, another key component of the value index, demonstrated resilience, climbing 3.5%. This performance reflects ongoing infrastructure spending and stabilizing supply chains, which are bolstering manufacturing activity. Companies involved in heavy machinery, aerospace, and construction materials reported encouraging Q3 earnings, suggesting that the underlying corporate economy remains healthy despite macroeconomic headwinds.

• Materials Strength: Companies in the materials sector, essential for infrastructure development, benefited from increased commodity demand, pushing the sector up 3.8%.
• Defensive Utilities: Even traditionally defensive sectors like utilities, classified as value, saw modest gains (up 1.2%), providing stability during periods of market uncertainty driven by interest rate volatility.
• Consumer Staples Stability: Consumer staples, known for steady cash flows, held firm, reinforcing the move toward companies whose earnings are less cyclical and more predictable, a core tenet of value growth divergence investing.

This sector-by-sector analysis confirms that value’s November outperformance was fundamentally driven by macro factors—higher rates and economic resilience—that favor companies with tangible assets, current profitability, and lower sensitivity to long-term valuation models. The rotation was less about internal corporate news and more about external market plumbing.

Monetary policy outlook: the ‘higher for longer’ paradigm shift

The Federal Reserve’s communication throughout the autumn has been crucial in shaping investor behavior. While the Fed paused rate hikes in November, Chairman Jerome Powell maintained a decidedly data-dependent stance, emphasizing that policy remains restrictive and that the central bank is prepared to raise rates further if inflation pressures re-emerge. The market’s interpretation of this ‘higher for longer’ mantra has been the most significant driver of the recent value growth divergence.

Analysts at Goldman Sachs revised their 2025 rate cut projections downwards following the November employment report, now anticipating only two 25-basis point cuts, starting in the second half of the year, compared to previous forecasts of three or four cuts. This recalibration means the cost of capital is expected to remain elevated for longer than previously assumed. For growth companies reliant on cheap debt for expansion and acquisitions, this prolonged period of high rates poses a structural challenge to their business models.

Conversely, value companies, particularly those in energy and materials, often operate with lower leverage or benefit from inflationary hedges embedded in their business structures. Their profitability is less dependent on marginal debt financing and more on underlying commodity prices or industrial demand. Therefore, a ‘higher for longer’ environment acts as a structural tailwind for value relative to growth.

The role of quantitative tightening (QT)

Beyond the federal funds rate, the ongoing process of quantitative tightening (QT)—where the Federal Reserve reduces its balance sheet by allowing Treasury and mortgage-backed securities to mature without reinvestment—continues to drain liquidity from the financial system. As of the end of November, the Fed’s balance sheet had decreased by over $1.5 trillion since the peak in 2022, according to official Fed data. This removal of liquidity exacerbates the pressure on risk assets and high-multiple stocks, potentially favoring the perceived safety and stability of value-oriented investments.

• Liquidity Impact: Reduced systemic liquidity generally leads to higher volatility and tighter financial conditions, making investors more risk-averse.
• Capital Allocation: Corporations face stricter capital allocation decisions under tighter financial conditions, prioritizing efficiency and profitability over aggressive, debt-fueled expansion—a hallmark of many value enterprises.
• Market Depth: QT reduces the depth of the Treasury market, potentially increasing the volatility of long-term rates, which disproportionately affects the valuation models of long-duration growth assets.

The confluence of sustained high nominal rates and balance sheet reduction suggests that the macroeconomic environment remains structurally supportive of the rotation observed in November. Until there is clear evidence of a significant and sustained decline in core inflation, the monetary policy stance will likely continue to favor companies with robust current earnings over those promising substantial future growth.

Assessing the valuation gap: mean reversion potential

The argument for a continued value rally often centers on the extreme valuation gap that persisted even before the November rotation. Historically, value stocks have traded at a significant discount to growth stocks, but the magnitude of the discount witnessed over the past few years reached near-record levels, comparable only to the peak of the dot-com bubble in 2000.

According to data compiled by Bank of America Global Research, the price-to-book ratio for the value index was approximately 1.8x at the start of November, while the growth index traded closer to 5.5x. While this gap has narrowed slightly due to the recent performance swing, it remains historically wide. This wide disparity suggests significant potential for mean reversion, where value stocks close the gap not necessarily through explosive earnings growth, but through a re-rating of their multiples as investors seek undervalued assets.

The quality factor in value investing

Modern value investing is increasingly focused on the ‘quality’ factor—identifying companies that trade at low valuations but possess strong fundamentals, low debt, and high returns on equity (ROE). These are not simply ‘cheap’ stocks, but fundamentally sound businesses that have been temporarily overlooked. The November rally saw strong performance from high-quality value names in industrials and healthcare, suggesting investors are discerning between truly undervalued companies and those trapped in structural decline.

For example, pharmaceutical companies with robust drug pipelines and steady dividend payouts, often categorized as value, showed resilience. Likewise, certain integrated oil companies, having used recent profits to pay down debt and initiate substantial share buyback programs, look fundamentally more attractive than highly leveraged, pre-profit technology startups. This shift towards quality value mitigates some of the historical risks associated with ‘value traps.’

The persistent valuation gap, coupled with a fundamental macro environment that penalizes long-duration assets, provides a compelling structural case for continued value growth divergence. While market shifts are rarely linear, the fundamental metrics suggest that value has substantial room to run before its valuation reaches historical parity with growth.

The growth stock challenge: navigating margin pressure and regulation

The 2.4% decline in growth stocks in November reflects not only interest rate sensitivity but also increasing micro-level challenges related to profitability, competition, and regulatory risk. Many high-growth companies, particularly in the software and internet sectors, are dealing with decelerating revenue growth rates compared to the pandemic-era highs. Furthermore, wage inflation and rising input costs are squeezing operating margins, making it harder to justify their premium valuations.

The ‘Magnificent Seven’ stocks, which have driven much of the S&P 500’s performance over the last two years, faced particular scrutiny. While their overall earnings remain strong, the market is beginning to differentiate between those that can sustain hyper-growth in a high-rate environment and those that are vulnerable to competition or saturation. For instance, companies relying heavily on digital advertising revenue are facing cyclical slowdowns, leading to cautious forward guidance that disappointed investors in November.

Regulatory headwinds and geopolitical risk

Regulatory risk, particularly in the technology sector, is becoming a material factor. Antitrust investigations and increased scrutiny of data privacy practices in the U.S. and Europe introduce uncertainty that can weigh heavily on growth stock valuations. Geopolitical tensions, especially concerning supply chains for semiconductors and critical minerals, also disproportionately affect technology manufacturing and hardware producers, which are significant components of the growth index.

• Antitrust Pressure: Ongoing regulatory actions against major tech platforms create uncertainty regarding future business models and potential breakups, dampening investor enthusiasm.
• Margin Compression: Labor costs and the expense of AI infrastructure development are increasing, putting pressure on the gross margins of software and cloud computing firms.
• Decelerating Momentum: As the economy matures post-pandemic, the exponential revenue growth rates that initially justified extreme valuations are becoming harder to achieve, leading to a necessary re-evaluation of forward multiples.

For the growth complex to regain dominance, the Federal Reserve would likely need to pivot aggressively toward substantial rate cuts—a scenario that currently appears unlikely given the resilience of core inflation and the labor market. Absent this pivot, growth stocks must demonstrate superior earnings growth and margin expansion to overcome the drag of higher discount rates and mounting regulatory pressures, thus narrowing the value growth divergence.

Investment implications: navigating the factor shift in 2025

The November factor rotation provides critical clues for investors positioning their portfolios for 2025. The shift from growth to value implies a preference for companies with strong balance sheets, consistent dividends, and exposure to cyclical economic recovery rather than purely disruptive technological innovation. This does not mean abandoning technology entirely, but rather focusing on technology companies that demonstrate profitability and reasonable valuations, often referred to as ‘value tech.’

Analysts at JPMorgan Chase & Co. suggest that the current environment favors a barbell strategy: maintaining exposure to high-quality growth names with proven cash flows while significantly increasing allocations to deep value sectors like energy, infrastructure, and certain segments of materials. They project that value could outperform growth by 5 to 7 percentage points over the next 12 months, provided the 10-year Treasury yield remains above 4.5%.

Portfolio rebalancing considerations

Investors should review their portfolio’s factor exposure. If a portfolio is heavily concentrated in the Russell 1000 Growth Index components, it may be overly sensitive to interest rate fluctuations and regulatory risks. Rebalancing towards value can offer both diversification benefits and potentially higher risk-adjusted returns in the current macro environment.

• Focus on Free Cash Flow: Prioritize value companies with high free cash flow yields, as this metric provides a better indicator of financial health than simple P/E ratios in a high-rate environment.
• Dividend Resilience: Seek companies with a long history of increasing dividends, which often act as a buffer against market volatility and are common in value sectors like utilities and consumer staples.
• Geographic Diversification: Value stocks often have higher international revenue exposure than many U.S.-centric growth companies, offering a hedge against potential domestic economic slowdowns.

Ultimately, the November value growth divergence serves as a powerful reminder that macroeconomics dictates market leadership. The shift is fundamentally driven by the cost of capital, and until that cost dramatically falls, the structural tailwinds favoring value are likely to persist, making a compelling case for a continued rotation into 2025.

Frequently asked questions about the value-growth divergence

The bottom line

The November market action, defined by the 3.0% rise in value stocks and the 2.4% fall in growth stocks, represents a clear signal that the market is adjusting to a new macroeconomic reality. The era of near-zero interest rates, which fueled the exponential rise of high-multiple growth stocks, is definitively over. The current environment, characterized by sticky inflation and a Federal Reserve committed to restrictive policy, fundamentally favors companies with strong current cash flows, tangible assets, and lower debt burdens—the core attributes of value investing.

Investors should monitor several key indicators moving into 2025: the trajectory of the 10-year Treasury yield, the weekly jobless claims data for signs of labor market weakening, and the Federal Reserve’s updated Summary of Economic Projections (SEP). A sustained yield above 4.5% will likely continue to support the value growth divergence. While growth stocks may experience tactical rallies, the structural shift toward quality value, driven by monetary policy and the persistent valuation gap, suggests that value leadership is not merely a short-term trade but a foundational theme for the next phase of the economic cycle. Portfolio construction should reflect this reality, emphasizing diversification away from crowded, rate-sensitive growth trades and into fundamentally solid, cyclical value opportunities.