A perennial faceoff

The financial results of Warren Buffett’s Berkshire Hathaway released in February weighs into the value versus growth debate. The company reported record operating profits for 2024 and has been a net seller of stocks over the past eight quarters despite steadily rising US stock markets.

Buffett is one of the most consistent advocates of value investment. Berkshire Hathaway is currently sitting on US$334.2 billion of cash rather than putting it into assets with growth characteristics.

The top-performing stocks that have helped deliver the ramp-up in US equities over the past few years mostly exhibit characteristics usually associated with growth stocks: they are currently overvalued or at least highly valued, they have high price/earnings ratios, and they are volatile.

For example, Nvidia’s P/E ratio at the time of writing was around 52.90 versus a market average of around 20-25, which would imply that it is overvalued. In late January, Nvidia suffered a record $593 billion one-day loss in market value after news of Chinese startup DeepSeek’s competing artificial intelligence technology.

In late January, Tony DeSpirito, global CIO of BlackRock Fundamental Equities, said that market movements up to the first half of 2024 had reinforced “two exceptional years for growth and more than a decade of leadership over value”. According to figures he quoted, growth stocks are at a record high, accounting for around 37% of the S&P 500 compared to just under 10% for value stocks. This divergence has widened substantially since 2007 when the two styles converged at about 17%-18% each of the S&P 500.

DeSpirito argued that value stocks are currently well undervalued, that growth investors are over-exposed to a relatively narrow gamut of overvalued stocks, and that the last time there was a similar divergence between growth and value in December 2000 just before the dot-com crash, value stocks went on to outperform growth stocks.

Given numerous warning signs lately about peaky US stock valuations, this would be no surprise. And as Berkshire Hathaway’s results show, growth investors in the current market can still perform strongly. Value investors look like they had better come up with answers.