7 Brutal Reasons Why the Value Factor Underperforms Growth in the 2025 Cycle (And What to Do)

Okay, let's just say it. It feels wrong, doesn't it?

You did what you were supposed to do. You read the "Intelligent Investor." You listened to Warren Buffett. You looked for solid, boring, profitable companies trading at a discount—the classic "value" play. You bought the bank, the utility, the consumer goods company. It's the sensible, grown-up thing to do.

And then you watched as some AI-powered-cloud-SaaS-blockchain-whatever company that has never turned a profit, trades at 300x sales, and whose S-1 filing reads like a sci-fi novel... proceeded to double. And then double again.

Meanwhile, your "sensible" value stock just... sits there. Or worse, it drops.

As a founder, a creator, or a small business owner, this is more than just frustrating. It feels like the fundamental laws of business gravity have been repealed. We're operators. We live and die by profit and loss, by cash flow, by tangible results. So when the market rewards the exact opposite, it's maddening. You're not just an investor; you're a builder. And the market seems to be telling you that building a solid, profitable business is... well, dumb.

This isn't just a 2024 problem. This has been a soul-crushing decade for value investors. And as we dig into the 2025 cycle, the gap between "growth" and "value" has become a chasm. So, why? Why does the value factor continue to underperform growth, and why does this 2025 cycle feel particularly brutal?

Let's grab a coffee and break it down, operator-to-operator. No fluff, no academic jargon. Just what's really going on under the hood.

First, What Are We Even Talking About? (Value vs. Growth 101)

Let's level-set. When people talk about "value" and "growth," they're talking about two different "factors," or characteristics of stocks that can explain their returns.

• Value Investing: This is your "buy a dollar for 50 cents" philosophy. You're looking for companies that are cheap relative to their fundamentals. The classic metrics are a low Price-to-Earnings (P/E) ratio, a low Price-to-Book (P/B) ratio, or a high dividend yield. Think: boring banks, established industrial companies, utilities, or consumer staples. The bet is that the market is wrong about this company and will eventually "discover" its true, higher worth.

• Growth Investing: This is your "buy the future" philosophy. You're looking for companies that are expected to grow their sales, revenue, and (eventually) earnings at a much faster rate than the rest of the market. You don't care that it's "expensive" right now (high P/E, high P/S) because you believe its future growth will more than justify the price. Think: tech, SaaS, biotech, AI, and e-commerce. The bet is that this company will become the new blue chip.

As an operator, you can think of it this way: Value investing is like buying a solid, cash-flowing-but-boring local laundromat at a great price. Growth investing is like being an angel investor in your friend's unproven, high-potential AI startup. For the last 15 years, the market has overwhelmingly rewarded the angel investor.

The Historical Smackdown: When Value Was King

The reason this is so painful is that it's not supposed to be this way. For the better part of a century, value investing crushed growth. It was a statistical fact.

Academics Eugene Fama and Kenneth French won a Nobel Prize for their "Three-Factor Model," which showed that, over time, stocks with two characteristics—(1) smaller market caps and (2) high "book-to-market" ratios (i.e., value stocks)—tended to outperform the broader market. This was the playbook. It was gospel. It was taught in every MBA program.

This long-term outperformance is why so many legendary investors are value investors. It's why your dad's playbook (and his dad's playbook) was to buy "good, cheap, dividend-paying stocks" and hold them forever. The problem? That playbook stopped working around 2007 and has been absolutely decimated ever since. The entire foundation of "what works" in the market has been shattered.

The 7 Brutal Reasons Why Value Factor Underperforms Growth in the 2025 Cycle

Okay, so why did the gospel fail? Why is your "sensible" stock flatlining while the Silicon Valley rocketship just broke orbit? It's not one thing. It's a "conspiracy" of seven massive, overlapping shifts.

Reason 1: The Interest Rate Straitjacket

This is the big, academic one, but stick with me. How do you value a stock? You take all its future earnings and "discount" them back to what they're worth today. The "discount rate" you use is heavily influenced by interest rates.

• Growth stocks are "long-duration" assets. Almost all of their value comes from earnings expected way out in the future (think 2030, 2035).
• Value stocks are "short-duration" assets. Most of their value comes from earnings they're making right now or next year.

When interest rates were at ZERO for a decade (2009-2021), those future 2035 earnings were worth a ton in today's money. There was no "cost" to waiting. This was rocket fuel for growth stocks. "Profits are optional, just grow!"

"But wait!" you say. "Rates have shot up since 2022! Shouldn't that kill growth stocks and help value?"

Logically, yes. Higher rates should crush long-duration assets. And they did... for a minute in 2022. But the 2025 cycle has a weird twist. The market is now so addicted to growth—and so convinced that the Fed will have to cut rates at the first sign of a real recession—that growth stocks have become a "coiled spring." Every bit of bad economic news is seen as "good" news because it means the Fed might cut rates, which would turn the rocket fuel back on. Value stocks, particularly banks (which like higher rates), get sold off in this environment. It's a completely inverted, through-the-looking-glass world.

Reason 2: The AI Singularity (Or at Least the Hype Cycle)

Let's be real. The story of 2024-2025 isn't "value vs. growth." It's "AI vs. Everything Else."

A tiny handful of "Magnificent 7" type stocks (NVIDIA, Microsoft, Google, Amazon, Apple, Meta, Tesla) are responsible for almost all of the market's gains. These are the very definition of "growth" stocks. And they aren't just growing; they're perceived as owning the keys to the next industrial revolution: Artificial Intelligence.

This isn't a normal cycle. It's a narrative-driven mania. When investors believe a technology is as transformative as the internet or electricity, they will pay any price for it. "Valuation" goes out the window. It's a land grab. Your "cheap" bank stock doesn't have an AI story. It doesn't matter if it's profitable or has a 4% dividend. It's boring. It's not part of the future. The market has become a high-stakes bet on one single theme, and that theme is 100% concentrated in the growth bucket.

Reason 3: The "Winner-Take-All" Economy

This is related to AI, but it's a deeper, structural problem. The old "value" companies operated in a world of healthy competition. The "growth" companies of today operate in a world of network effects and "winner-take-all" moats.

Think about it: How many competitors does Google really have in search? How many competitors does Microsoft really have in desktop OS? Or Amazon in e-commerce infrastructure (AWS)? These companies aren't just growing; they're monopolies or oligopolies in disguise.

Their growth isn't just cyclical; it's structural. They absorb entire industries. This breaks the old models. The "reversion to the mean" that value investing relies on—the idea that a great company will eventually face competition and its growth will slow—doesn't seem to apply when a company owns the network. This makes "growth" a much more durable, persistent factor than it used to be.

Reason 4: The Ghost in the Machine: Intangible Assets

This is, in my opinion, the most important reason. It's the one that breaks the "value" metric itself.

What is the classic value metric? Price-to-Book. "Book value" is literally the value of a company's assets as recorded on its balance sheet. This system was designed for an industrial economy: factories, machinery, inventory, land. These are tangible assets.

Now, what is Google's most valuable asset? Its search algorithm. What is Apple's? Its brand and ecosystem. What is your most valuable asset as a creator? Your audience and reputation.

None of these are on the balance sheet.

Under old-school accounting rules, R&D spending, brand building, and community development are expenses, not investments. So, a "growth" company like Microsoft spends billions building its AI models, and its "book value" stays low, making its P/B ratio look astronomically (and artificially) high. Meanwhile, a "value" company like an old automaker has billions in factories, so its "book value" is high, making its P/B ratio look "cheap."

The metrics are lying. We're using an industrial-age map to navigate a digital-age world. "Growth" stocks look perpetually expensive, and "value" stocks look perpetually cheap, because the very definition of "asset" is broken.

Reason 5: The Weird Inflation Twist

Textbook investing says high, sticky inflation should be good for value stocks. Why? Because "value" baskets are often full of "real asset" companies: energy, materials, industrials. The stuff that inflation is made of.

But this inflationary cycle has been different. The real winners of inflation haven't been the companies that produce commodities, but the companies with pricing power.

Who has pricing power? The "winner-take-all" growth companies. Apple can raise the price of an iPhone by $100, and people will grumble but pay it. Microsoft can increase its Office 365 subscription, and every business in the world just... pays. Their brand and ecosystem moats give them an invulnerable ability to pass on costs.

Your "value" utility company, on the other hand, can't just raise rates. It has to beg a regulator. Your "value" consumer goods company is in a price war with a generic brand. They get squeezed. In this cycle, the "growth" monopolies have become the new inflation hedge, stealing the last real argument from the value playbook.

Reason 6: The Great "Flow-pocalypse" (ETFs & Passive Investing)

This is a structural, "dumb money" reason. But it's powerful.

Where does your 401(k) or retirement money go every two weeks? For most people, it goes directly into a passive, market-cap-weighted ETF, like one that tracks the S&P 500.

How do those funds work? They don't ask if a stock is cheap or expensive. They just buy stocks in proportion to their "market cap" (how big they are).

1. Apple and Microsoft become huge "growth" stocks.
2. This gives them the biggest market caps in the S&P 500.
3. Your 401(k) money flows in, and the fund must buy Apple and Microsoft, regardless of price.
4. This buying pressure pushes their prices... higher.
5. This gives them an even bigger market cap.
6. Rinse and repeat.

This creates a massive, non-stop, price-insensitive buying loop that overwhelmingly benefits the biggest stocks, which just so happen to be... "growth" stocks. Value stocks, with their smaller market caps, get left behind. The rise of passive investing has become a self-fulfilling prophecy for growth's dominance.

Reason 7: We're All Dopamine Addicts

This is the human reason. The "coffee shop" reason.

As operators, creators, and marketers, we know this better than anyone: attention is the new currency. You're fighting for 3 seconds of attention on TikTok. You're trying to get a 30% open rate on an email. We live in a world of instant feedback and dopamine hits.

Value investing is the antithesis of this world. It is the definition of delayed gratification. Its entire premise is "buy this boring, unloved thing and... wait. Maybe for 5-7 years."

Who has that kind of patience anymore? The market is now driven by the same short-term psychology. We've been trained for 15 years (ever since the 2009 bottom) that "buying the dip" in tech works, and it works fast. We're all addicted to the narrative, the excitement, the moonshot. "Growth" provides that dopamine hit. "Value" feels like a punishment. This behavioral shift is, perhaps, the most powerful factor of all.

The 3 Big Mistakes We Operators Make in This Market

Seeing all this, it's easy to make a few classic, emotional mistakes. As founders and creators, we're especially vulnerable because we're optimists and action-takers.

A Practical, Non-Advice Framework for Thinking About This

So, you're an operator, you've got some cash (either personally or in the company treasury), and this market is making you feel like a chump. What's the framework? (Again, not advice!)

1. Acknowledge the Game Has Changed

Stop trying to fit a square peg in a round hole. The old P/B models are broken. Intangible assets (Reason #4) are real. Winner-take-all dynamics (Reason #3) are real. You can't just buy "low P/E" and expect to win. You must now ask why it's low. Is it a true "value" or a "value trap" being eaten alive by a growth monster?

2. Separate Your "Business" from Your "Balance Sheet"

This is my #1 framework for founders. Your business is your high-growth bet. It's your offense. Your balance sheet (company treasury or personal savings) is your defense. Its job is not to shoot the lights out. Its job is to ensure you survive long enough for your offense to win. Does your "defense" really need to be 100% in on the AI narrative? Or should its job be capital preservation?

3. Look for GARP (Growth at a Reasonable Price)

The world isn't a binary choice between "value" and "growth." The sweet spot, for many, is GARP. These are companies that are still growing (maybe 10-15% a year, not 100%), but don't trade at insane valuations. They are profitable now. Think: Microsoft in the 2010s. It's the boring-but-great operator's portfolio. It blends the best of both worlds.

4. Focus on What You Actually Control

Here's the truth. None of us can control interest rates, AI hype, or ETF flows. You know what you can control? Your company's revenue. Your profit margins. Your customer list. Your product.

The single best investment you can make in this (or any) market is your own business. The second-best might be paying down high-interest debt. The third-best might be building a cash buffer (which, with today's rates, actually pays you a yield!). Worrying about value vs. growth is a distraction from your #1 job: building an antifragile business that can survive any market cycle.

Your Burning Questions on Value vs. Growth (2025 Edition)

1. Is value investing dead forever?

Answer: No, "dead" is too strong. But "value investing" as defined by the simple 1970s metrics (like Price-to-Book) is severely broken.

The philosophy of buying an asset for less than its intrinsic worth is timeless. The practice of it now must account for intangible assets, disruptive technology, and moats. Modern value investors (should) look very different from their predecessors.

2. Why did value investing usually outperform historically?

Answer: Two main theories: 1) It was a risk premium—value companies were often closer to bankruptcy, so investors demanded a higher return for holding them. 2) It was a behavioral premium—investors over-hyped exciting growth stocks and oversold boring value stocks, allowing smart investors to profit from the "reversion to the ean." (See The Historical Smackdown).

3. What single metric shows why value factor underperforms growth in 2025?

Answer: There's no single metric, but the most telling chart is the "valuation spread." This measures the valuation gap between the most expensive stocks (growth) and the cheapest stocks (value). Right now, that spread is near its widest point in history, rivaling the dot-com bubble of 2000. This shows just how extreme the market's preference for growth (and disdain for value) has become.

4. How do interest rates really affect growth stocks?

Answer: Think of a growth stock as a bond with a 30-year maturity. Its value is based on earnings far in the future. Higher interest rates act as a higher "discount rate," making those distant future earnings worth much less in today's dollars. That's the theory. In practice (as discussed in Reason 1), the expectation of future rate cuts is now propping them up.

5. Is the 2025 cycle just like the 2000 dot-com bubble?

Answer: It has similarities (mania, high valuations, one dominant theme) but one massive difference. In 2000, the "growth" companies (like Pets.com) had no profits and no path to profits. In 2025, the "growth" leaders (like Microsoft, Google, NVIDIA) are unfathomably profitable. They are some of the best businesses in human history. This makes the current situation much more complex and durable.

6. As a founder, should I just hold cash?

Answer: This is not financial advice. However, for the first time in 15 years, cash is not "trash." With high short-term interest rates, holding cash (in T-bills, a high-yield savings account, or a money market fund) provides a respectable, risk-free return. This "yield" gives you optionality. It allows you to survive a downturn in your business or deploy capital when a real opportunity (not a FOMO chase) appears.

7. What is a "value trap"?

Answer: A value trap is a stock that looks cheap on paper (low P/E, low P/B) but keeps getting cheaper. It's cheap for a reason. Its business is being fundamentally disrupted (e.g., a print newspaper in 2010, a regional bank losing to FinTech in 2025). You buy it thinking it's a bargain, but it's really a melting ice cube.

8. What happens if AI is a bubble and it pops?

Answer: If the AI narrative (see Reason 2) breaks, you would likely see a violent and immediate "rotation." Money would flee the handful of over-owned growth stocks and pour into everything else. The value factor would almost certainly have a period of massive, short-term outperformance. The problem is, timing this is impossible.

9. What are the best trusted sources for factor investing research?

Answer: Beyond the academic sources already linked (like the Nobel Prize site) and government data (like the BEA and Federal Reserve), many large asset managers publish excellent, free research. AQR Capital Management and Research Affiliates are two of the most respected names in the "quant" and "factor" investing space.

The Final Word: Stop Picking Fights, Start Building Your Ark

Look, it's tempting to get tribal about this. To plant your flag as "Team Value" or "Team Growth." But that's a sucker's game. It's an emotional fight, and the market doesn't care about your emotions.

You're an operator. You're a builder. Your job isn't to predict the weather; it's to build an ark that can survive the storm. And right now, the storm is a weird one: a world where profits are punished, monopolies are celebrated, and the very metrics we use to measure "value" are decades out of date.

Understanding why the value factor is underperforming in this 2025 cycle—from broken metrics to AI mania to the psychology of a dopamine-driven market—is your first step. It stops you from making emotional mistakes. It stops you from feeling like you're crazy.

You're not crazy. The game is just different.

So, my challenge to you is this: Stop worrying about which "team" is winning. Look at your own business. Look at your own balance sheet. Are you building something that can last? Is your "defense" (your cash, your savings) positioned to protect your "offense" (your business)?

Now I want to hear from you. Which of these 7 reasons hits home the hardest? Are you seeing the "intangible asset" problem in your own industry? Are you fighting the FOMO chase? Drop a comment below. Let's talk it out, operator-to-operator.

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🔗 My First Retail Quant Strategy with Python Posted 2025-10-21 UTC