August 2025
The dynamics between growth and value stocks have long driven conversations among market participants, typically with a focus on large cap companies. However, important and distinct trends also exist within other segments of the market—namely small cap and international equities. This paper explores those differences across various indexes and offers insights into how these dynamics may shape future market performance. While outcomes are never certain, it is clear that each segment has unique drivers that can offer valuable guidance during periods of heightened uncertainty.
Over recent years, growth stocks—especially in the large cap space—have significantly outperformed value stocks. As of 6/30/2025, large cap growth stocks, as measured by the Russell 1000 Growth Index, had a five-year annualized return of 18.1%. In contrast, large cap value stocks, measured by the Russell 1000 Value Index, posted an annualized return of just 12.8%. On a rolling one-year basis, as shown in Chart 1, growth has outperformed value for a significant portion of the last 10 years with an active premium of 9.8%.
This discrepancy prompts a deeper question: how have growth and value stocks performed in other market segments, and what might we expect moving forward?
Interestingly, in contrast to the large cap segment, value has actually led in small cap and international markets. Table 1 shows the performance of the major indexes that represent the different asset classes. Small cap value stocks, for example, outpaced their growth counterparts by 5.1% on a five-year annualized basis. Internationally, the MSCI EAFE Value Index outperformed the MSCI EAFE Growth Index by 6.4%. This notable divergence merits a closer look into the underlying reasons.
Large-cap stocks, typically represented by indexes like the S&P 500 or Russell 1000, include the largest U.S. companies by market capitalization. For this analysis, we focus on the Russell indexes to better understand growth and value compositions. As seen in Chart 2, the Russell 1000 Growth Index is dominated by Information Technology with a 51.2% allocation. Moreover, the top 10 holdings make up a concentrated 58.7% of the index. This concentration means that the index’s performance is heavily influenced by a handful of large tech companies.
In contrast, the Russell 1000 Value Index has a more diversified structure. Financials hold the largest sector weight at 22.7%, and the top 10 holdings account for just 17.4% of the index. As a result, this index tends to perform well in periods when financials and other defensive sectors are strong. In general, growth stocks perform better in low-interest rate environments. This is because tech and other high-growth companies benefit from lower borrowing costs. Conversely, in times of rising rates or slowing economic growth, value stocks—often concentrated in Financials, Health Care, and Utilities—tend to offer more stability and resilience.
Small cap stocks, while smaller in market capitalization, play a critical role in portfolios due to their high growth potential. However, they also tend to be more volatile than their large-cap counterparts.
Though some of the dynamics mirror those in large caps, key differences exist. As shown on Chart 3, in the Russell 2000 Growth Index, Health Care represents the largest sector at 22.8%, and the top 10 holdings comprise just 7.1% of the index—indicating a much broader distribution of return.
This diversification doesn't necessarily reduce risk, however. Many small cap companies are still in early stages of growth and remain highly sensitive to interest rate changes. Lower rates make it easier for these firms to finance expansion, boosting their performance.
On the value side, the Russell 2000 Value Index is heavily weighted toward Financials, which account for nearly 27.7% of the index. This means small cap value stocks are more likely to perform well in higher-rate environments where financial firms can benefit from improved margins.
To examine international equities, we refer to the MSCI EAFE Indexes. While these indexes share some characteristics with U.S. counterparts, they add the complexity of cross-country economic exposure.
Both the MSCI EAFE Growth and Value indexes are more diversified than U.S. large cap indexes, with less sector concentration. For example, Industrials represent the largest sector in the MSCI EAFE Growth Index at 27.3%, while Financials dominate the MSCI EAFE Value Index at 35.8%. Furthermore, the top 10 holdings make up a significantly smaller portion of each index. The top 10 holdings in the growth index account for 20.7%, while those in the value index only account for 18.0%.
A unique aspect of international investing is the influence of country-specific economic conditions. The MSCI EAFE indexes are made up of multiple countries, the largest being Japan, the United Kingdom, France, Switzerland, and Germany. Nations such as Japan, France, and Germany have economies largely driven by Industrials, whereas Switzerland and the UK lean more toward Financials.
The composition of these economies, and their sectoral strengths, play a major role in driving performance. For example, a global industrial rebound may favor MSCI EAFE countries with heavy industrial exposure, while financial sector resilience may benefit the UK and Switzerland more.
While growth stocks have dominated in recent years in the large-cap segment, the story is more nuanced across small cap and international markets. Sector composition, geographic diversity, and interest rate environments all play pivotal roles in determining relative performance. Because of these relationships, investors must not group all growth or value stocks into one bucket, but instead consider their market capitalization and geographic exposure.
Understanding these dynamics allows investors to make more informed allocation decisions, particularly during uncertain or shifting economic conditions. Diversifying across styles and geographies remains a prudent strategy, as each segment has unique strengths and sensitivities that can complement one another in a broader portfolio. DeMarche has long-believed in utilizing a diversified portfolio of equities (among other asset classes), and the data shared above speak to that belief. While there are nuances to each asset class, a diversified portfolio should offer investors a more consistent return stream over time.
