How Interest Rate Cycles Shape the Battle between Growth and Value Stocks

Interest-rate cycles have a quiet but powerful influence on how markets choose between growth and value stocks. At a basic level, it comes down to time. Growth stocks promise most of their profits far into the future, while value stocks tend to earn money right now. When interest rates are low, the market is more willing to wait, future earnings feel valuable, optimism rises, and growth stocks often take the lead.

In response to the pandemic, central banks globally slashed rates toward zero and introduced massive monetary easing. This low-rate, highly accommodative environment propelled stock markets, especially growth and tech stocks, to sharp gains as investors chased future profits in a low discount-rate setting. Tech ETFs soared during this period before the tightening cycle began later.

Things change when rates start climbing. Higher interest rates make future profits less attractive because investors can earn more elsewhere with less risk. That is when growth stock valuations come under pressure, especially for companies that are not yet profitable. Value stocks, on the other hand, usually look sturdier in this environment. They often trade at lower multiples, generate steady cash flows, and sometimes pay dividends, features that feel comforting when money is expensive.

What makes this even more interesting is that markets do not wait for rate cuts to happen, they move on expectations. History shows that growth stocks often begin to recover before central banks actually start cutting rates, simply because investors can see the next turn coming. Falling bond yields, in particular, tend to act as an early signal.

When the U.S. Federal Reserve raised interest rates aggressively from near 0% in early 2022 to over 5% by 2023 to fight inflation, markets saw a clear divergence between growth and value performance. Growth stocks, especially high-valuation tech names, were hit harder because their earnings are expected further out in time and get discounted more when rates rise. Meanwhile, many value stocks held up relatively better because they have steadier current earnings and lower reliance on future profits. This effect was seen across indexes like the Russell 1000 Growth versus Russell 1000 Value, where research indicates that value outperformed growth by double-digit percentage points in that period of rising rates.

That said, rate cycles are not the whole story. Not all growth stocks react the same way, and not all value stocks are defensive. Profitable growth companies tend to weather rising rates far better than speculative ones, while “cheap” value stocks can stay cheap if their fundamentals weaken. Research shows that sector exposure, earnings quality, and cash-flow timing all play major roles alongside interest rates.

When interest rates rise, money typically shifts into cash and income-focused assets like money market funds, Treasury bills, short-duration or floating-rate bonds, and value sectors such as banks and dividend stocks. When rates fall, capital tends to flow into growth assets like tech and small-cap stocks, long-duration bonds, real estate/REITs, and other riskier investments that benefit from cheaper borrowing and higher future valuations.

Thus, interest rates do not just move markets up or down, they decide who gets rewarded. Growth thrives when money is cheap or about to get cheaper. Value shines when cash today matters more than promises tomorrow. Understanding where we are in the rate cycle can make the difference between fighting the market, and flowing with it.