Growth vs. Value Investing in a High-Interest Rate Environment: Which Investment Philosophy Will Prevail in 2025?

Nick Vosniakos | Νίκος Βοσνιάκος
Aug 14
10 min read

An extensive critical analysis of the two strategies, as investors seek their bearings in a landscape defined by higher monetary costs.

The Great Interest Rate Reset and the Rearrangement of the Investment Map

The year 2025 finds the global investment community at a critical turning point, facing a reality that seems unfamiliar to many: an environment of high interest rates. After more than a decade of near-zero borrowing costs, central banks, led by the US Federal Reserve (Fed) and the European Central Bank (ECB), have implemented a vigorous tightening policy to tame inflation. In 2022-2023, central banks aggressively raised interest rates to combat inflation, ending a decade of cheap money. Although the cycle of aggressive increases appears to have peaked, the common assumption is that interest rates will remain at "higher for longer" levels than we have been accustomed to. For the first time in more than two years, the Federal Reserve is keeping interest rates in the high range of 4.25%–4.50%, with central banks around the world adopting a similar stance. The Fed's decision to keep interest rates high despite pressure to cut them reflects concerns about inflation and uncertainty surrounding trade policies. In the same context, market expectations for further interest rate cuts have declined significantly, with investors adjusting their strategies for a "higher for longer" interest rate environment.

Investment Philosophies in high interest rate environment

This new situation is totally changing the investment scene, bringing back one of the most classic and talked-about dilemmas: Growth vs. Value. Which of these two fundamental investment philosophies is better positioned to thrive in the demanding environment of 2025? The answer is not straightforward and requires a deep, critical analysis that goes beyond simplistic generalizations. This analysis takes an in-depth look at the two investment philosophies, evaluates their performance in the current environment, and suggests practical approaches for the modern investor. In the following sections, we critically examine the two strategies, how they are affected by high interest rates, and which one appears to prevail in the current macroeconomic environment. In this article, we will thoroughly examine the two strategies, analyze the impact of high interest rates on their valuations, and provide specific examples of sectors that are expected to excel or struggle.

Definitions and Fundamental Differences

Definition and Characteristics of Growth Stocks

Growth Stocks: These are companies from which investors expect rapid growth in earnings and revenues, often higher than the market average, with great prospects for future growth. Think of technology, biotechnology, or renewable energy companies. They represent companies that are expected to grow faster than the market average. These companies typically reinvest their profits in expansion, research, and development rather than distributing high dividends. Their main characteristics include:

High revenue and earnings growth rates: Often above 15-20% per annum
High valuations: P/E ratios that can exceed 25-30
High P/B ratios
Low or zero dividend yields: Priority given to reinvestment in innovation and expansion
Return on equity (ROE): Above 15%
Debt-to-equity ratio: Low to reduce risk
High sensitivity to interest rate changes: Due to focus on future cash flows

Definition and Characteristics of Value Stocks

Value Stocks: These are shares of companies that trade at a price that appears low relative to their current fundamentals, such as earnings, cash flows, dividends, and book value. They are often mature companies in more "traditional" industries, such as banks, energy companies, manufacturing, and utilities. They are companies that are considered undervalued relative to their fundamentals. These companies usually offer:

Low valuations: P/E ratios below 15-18 or below the industry average
P/B Ratio: Below 2.0
Price-to-Sales Ratio: Low relative to competitors
Stable or high dividend yields: Often above 3-4%
Strong cash flows and profitability history, with Free Cash Flow: Positive and increasing
Stable or slowly growing business models
Reduced sensitivity to interest rate changes: Due to focus on current cash flows

The value investor aims to buy a stock below its intrinsic value and profit when its price returns to its “fair value.” In contrast, growth investors seek out future market “winners” and are willing to pay a premium today for the promise of high growth tomorrow. It is worth noting that these boundaries are not absolute: a company can be considered growth in one period and value in another. A typical example is Apple, which some analysts now consider more of a “value stock” than a “growth stock”, due to its mature profitability and dividends. Warren Buffett himself has stated that “growth and value investing are not opposing concepts, but complementary ones,” emphasizing that growth is an element of a company's real value. Despite these overlaps, in practice the two strategies behave differently under different economic conditions – especially with regard to the impact of interest rates.

Theoretical Dimension and Relationship with Interest Rates: How Do High Interest Rates Affect Growth and Value?

To understand which strategy prevails, we must first delve deeper into the mechanism by which interest rates affect the value of a share. The most widely used valuation model is Discounted Cash Flow (DCF). In simple terms, the value of a company today is equal to the total future profits it is expected to generate, discounted (reduced) to their present value at a specific interest rate, which reflects the cost of capital and risk.

In growth stocks, most of their value does not come from current earnings, but from high expectations for the distant future. When interest rates rise, the discount rate in the DCF model becomes higher. This disproportionately affects growth stocks, as their distant future earnings lose a significant portion of their present value. In other words, the promise of high profits in 5 or 10 years' time is worth significantly less when investors can secure a decent, almost risk-free return from government bonds today.

Value stocks, given that a significant portion of their value is based on current, tangible earnings and stable cash flows, are less negatively impacted by rising discount rates. In addition, many of these companies have strong balance sheets, low debt levels, and the ability to pass on increased costs to consumers, characteristics that are particularly valued in times of economic uncertainty.

The theoretical basis for the relationship between interest rates and stocks is based on the discounted future cash flow model. When interest rates rise, the present value of future cash flows declines more for growth companies, which have a larger portion of their expected earnings in the future. MSCI research from 2008 confirms that growth stocks do indeed have a longer "duration" than value stocks, making them more sensitive to interest rate changes. This means that in periods of rising interest rates, value stocks tend to outperform.

Macroeconomic Framework 2025: High Interest Rates and Impacts

The year 2025 is characterized by interest rates remaining high, with the Fed keeping its key rate close to 4.5%. While central banks may proceed with gradual rate cuts to support growth, interest rates are expected to stabilize at levels significantly higher than pre-pandemic levels. At the same time, the global economy faces challenges: geopolitical tensions, potential trade disputes, and persistent inflation in certain sectors (particularly services) are creating an environment of heightened uncertainty. The implications are multifaceted:

Growth Stocks: They suffer from higher capital costs and reduced present value of future earnings.
Value Stocks: They hold up better due to stable cash flows and dividends.

Historically, rising interest rates favor value stocks, as investors turn to more defensive options.

High interest rates create a complex environment for investors. In this context, investors are concerned about the following:

The resilience of corporate earnings: Will companies (especially growth companies) be able to maintain their profitability in an environment of more expensive money and potentially lower consumer demand? Will they attract capital or lose out to more attractive options, such as fixed-income securities?
The Cost of Financing: Which companies are vulnerable to high borrowing? Companies with heavy debt will find it difficult to refinance their loans at higher interest rates, which will put pressure on their profit margins. The increased borrowing costs affects growth companies that depend on external financing the most.
The shift to "quality": In times of uncertainty, investors tend to prefer "quality" companies. This includes companies with strong balance sheets, stable cash flows, leadership positions in their industries, and pricing power. These are characteristics often found in value stocks, but also in some mature growth stocks, leading to lower valuations for growth stocks due to higher discount rates.

Performance Analysis: What the Data Shows

2025 presents a particularly interesting picture when comparing the two strategies. According to Morningstar data, growth stocks continue to trade at a 16% premium to their fair value, while value stocks trade at a 7% discount. However, the picture is not monolithic. In the US, growth stocks continue to outperform in the long term, but internationally the picture is different. According to Morningstar's analysis, value stocks outperform almost everywhere outside the US:

Index	Five-year Return (Annualized)
Morningstar Global ex-US Growth	6.64%
Morningstar Global ex-US Value	12.66%
Morningstar Europe Growth	9.29%
Morningstar Europe Value	13.79%

The growth vs. value dilemma is not limited to the US market, of course. Similar trends can be observed globally, with some variations in momentum across regions. In European and developed international markets, value stocks have made a strong comeback since 2020. Overall, in a global environment of "higher for longer" (higher interest rates for a longer period), international markets with greater exposure to value (Europe, Japan, commodity-rich emerging economies) have a relative advantage over markets such as the US, which remain heavily growth-oriented.

Sectoral analysis and Conjunctive Thinking

The Value philosophy appears to have a theoretical and historical advantage. Sectors such as banking, energy, and healthcare offer a combination of defensive characteristics, attractive valuations, and resilience to higher interest rates. Investors seeking stability and income are likely to gravitate in this direction.

On the other hand, Growth has not yet had its final word, however, the era of easy and cheap financing is over. In 2025, "quality" growth companies will be rewarded – those with strong financial "moats", real profits and the ability to innovate and expand without depending on the goodwill of debt markets. Investors will no longer reward "growth at any cost." Instead, they will focus on "quality growth." Artificial intelligence and digital transformation remain strong long-term trends that cannot be ignored.

Sectors benefiting from high interest rates:

Banking: Higher interest margins
Insurance: Higher returns on their investments
Utilities: Traditionally considered defensive

Sectors affected by high interest rates:

Technology: Especially non-profitable growth companies
Real estate: Higher financing costs
Consumer Discretionary: Reduced consumer spending

Perhaps the most prudent approach for 2025 is not to choose dogmatically between Growth and Value, but to combine them. The Growth at a Reasonable Price (GARP) strategy, made famous by legendary investor Peter Lynch, seeks out companies that demonstrate above-average growth rates, but without the exorbitant valuations that usually accompany "hot" growth stocks. The "Growth vs. Value" dilemma in 2025 has no clear winner. The higher interest rate environment has changed the rules of the game, bringing fundamental analysis, valuation discipline, and an emphasis on quality back to the forefront of the investment process.

In conclusion, the most successful strategy for 2025 will likely be a hybrid, flexible approach. Investors are encouraged to look beyond labels and examine each company based on its own unique characteristics. The search for companies with strong fundamentals, reasonable valuations, and sustainable competitive advantages—whether they are in the "value" or "growth" bin – will be the compass for successfully navigating the challenging but opportunity-filled investment waters of 2025.

The question "Growth or Value in 2025?" does not have a single answer. Both philosophies have a role to play, depending on the macroeconomic backdrop. In an environment of persistently high interest rates and inflation, value stocks will likely continue to be favored by investors. However, if interest rates start to fall and inflation returns to a more normal level, we should not be surprised to see a new round of outperformance by growth leaders, as the pendulum swings back in the other direction. For serious investors—institutional or retail—the strategic choice is clear: diversification and critical analysis of each situation. Maintaining a balance between quality value stocks and selected growth stocks can offer both protection and growth potential for investment portfolios.

Conclusions: Which Strategy Prevails?

The answer to the question "Growth vs. Value" is not one-dimensional. 2025 has shown that both strategies can be successful, but in different environments and geographies. The high-interest rate environment of 2025 does not mean the end of growth investments, but rather the need for greater selectivity. Successful investors will be those who manage to combine the stability of value investments with the growth potential of quality growth stocks. Technology and innovation continue to drive the market, but the stability and dividend yield of value stocks offer security in times of uncertainty. 2025 is a year full of challenges but also opportunities. The key lies in understanding when and how to use each strategy to maximize returns and limit risks in a complex macroeconomic environment. The choice between growth and value is not absolute. Instead, balance, flexibility, and fundamental analysis are the keys to a successful investment strategy.

DISCLAIMER & NOTICES: This is a marketing communication, it has not been prepared in accordance with legal requirements for independent investment research and is not subject to the relevant distribution restrictions, and is provided solely for informational/educational purposes. The information contained on this website is provided for informational purposes only and does not constitute investment advice or an invitation or offer to buy or sell any financial instrument. Although every effort is made to provide accurate and up-to-date information, no warranty or representation is made as to the accuracy, completeness, or timeliness of the content of this website. Financial markets and companies are subject to frequent changes, and it is important to independently verify any information before making investment decisions. This article is based on research and data available at the time of writing. The content is based on sources believed to be reliable at the time of writing, without any guarantee of accuracy/completeness/timeliness and without any obligation to update. No express or implied warranty is given as to accuracy, completeness, timeliness, or suitability, and there is no obligation to update or revise. Third-party links are provided for convenience; no control is exercised over their content and no responsibility is assumed for it. Investment decisions should always be made after careful analysis and, if necessary, with the advice of professional advisors. Markets involve risks, investments may fluctuate, and investors may lose some or all of their investment. Past performance is not indicative of future performance. You should not rely solely on the information or opinions expressed on this website when making investment decisions. Any investment decision or action you take is solely your responsibility. Always seek the advice of a qualified licensed financial advisor who understands your investment objectives and risk profile. This website does not create a financial advisor-client relationship. All content on this website is of a general nature and does not refer to the circumstances of specific individuals or entities. The author may hold positions in the instruments mentioned and may change them without notice. Under no circumstances shall we be liable for any direct, indirect, special, consequential, or incidental damages arising out of or in connection with the use or unavailability of the website and its content.