3 Reasons to Buy Value Stocks Before January 1

Value stocks are having a rough go in 2024, at least compared to broader stock indexes.

The benchmark S&P Value Index is up 10.46% on a year-to-date basis. That's well below the S&P 500, which has generated 23.8% returns over the same time period. The index is also well below the year-to-date performance of the S&P Growth Index, which stands at 35.11% as of December 20.

Yet as the calendar flips to 2025, value stocks seem to be in a decent position.

Here’s three reasons why value stocks may be a good bet for 2025.

"Inflation is moderating, and the economy seems to be steadying," says Jason Hishmeh, co-founder at Varyence, a technology firm that works with startup companies to grow their business. "That's great news for sectors like manufacturing, financials, and energy, which tend to perform well in this environment. Companies with strong fundamentals—low price-to-earnings ratios and steady earnings growth—look particularly attractive."

Other market experts say Main Street investors need to get a good grip on what value stocks really represent.

"Value stocks are a group of underappreciated and ignored stocks that are worth more than their fundamentals would suggest," says Stephen Callahan, trading behavior analyst at Firstrade. "This is a market driven by momentum. As a value investor, valuations are never a reason to own something. Fundamentals are the reason why you own something. We need to match those two things up."

What's more, not all cheap stocks are value stocks.

"Some stocks are cheap for quantifiable reasons, such as poor earnings," Callahan says. "Value stocks are good companies at low prices. They are financially stable, have high-profit margins, low debt-to-income ratio, strong earnings, and while not mandatory, a good sign is that they pay dividends."

Value stocks have several trends pointing upward heading into a new year. Market experts point to these largest 2025 impactors.

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Back in business under Trump. President-elect Donald Trump said he'd prioritize a business-friendly agenda in his campaign stump speeches, which would be good news for value stocks.

"Trump spoke frequently about reducing the government deficit, lowering energy costs through increased domestic drilling, and implementing potentially looser regulations," says Ronen Cojocaru, CEO at San Francisco-based 8081.io, a fintech company that simplifies and automates digital asset trading. "Additionally, the prospect of corporate-friendly tax reforms could enhance profitability, making value stocks more attractive to investors."

Key expectations coming from the Trump camp include reduced regulations in sectors such as energy, financials, crypto, and industrials, which could lower compliance costs and increase profitability.

"Additionally, corporate-friendly tax reforms may enhance earnings, while a focus on domestic production and energy independence could create new opportunities for growth in the energy and manufacturing sectors," Cojocaru says. "But we should all look carefully at how Trump administration tariffs will take place, which can play a significant role in that space."

Large-cap value stocks to shine. In early December, BofA analysts projected the U.S. gross domestic product would rise by 2.4%, well ahead of other analyst projections that landed in the 2.0% range. Economists say that any GDP above 2% is good news for well-run, long-established companies that turn a profit.

So-called "GDP-sensitive" companies should benefit from a growing U.S. economy. “We see more opportunities in stocks than the index,” notes BofA head of U.S. equity and quantitative strategy Savita Subramanian in a recent research note, which pegged the S&P 500 at a 6,666 target price for 2025. “In particular, we like companies with healthy cash return prospects and a tether to the US economy: large-cap value stocks.”

Cojocaru says large-cap value stocks are well-positioned to perform strongly in 2025, especially if the trends highlighted by BofA analysts continue to shape the market.

"Companies in this sector demonstrated remarkable resilience in 2024, navigating a high-inflation environment by adopting strict cost controls, improving operational efficiency, and managing capital strategically," he notes. "These actions now yield significant benefits as inflation moderates and interest rates show signs of stabilizing or potentially declining."

An upward trending economy. With analysts calling for a healthy US economy, a strong labor market, moderating inflation, and the resulting potential for further interest rate cuts, value stocks should rise accordingly.

"The economy is looking pretty solid right now, with strong jobs, inflation starting to settle, and maybe even some interest rate cuts on the horizon,"  says Nick Scibilia, CEO of Orbit, a social media platform geared toward younger investors. 

That scenario represents "awesome news" for value stocks, Scibilia notes. "People are spending more, businesses are booming, and that means more cash for those established companies," he says. "Plus, if interest rates drop, those steady dividend-paying value stocks will look even better."

Watch out for risks. Even with a generally rosy outlook on the sector, value investors should know various possible risks.

"Firstly, if inflation persists and interest rates continue to increase, value stocks could underperform," Scibilia says. "Secondly, a recession is still possible, and value stocks are not immune to economic downturns. Lastly, geopolitical uncertainty and global events could disrupt market conditions and negatively impact value stocks."

Still, Scibilia sees several sectors looking pretty hot right now.

"Energy has been a bit wild lately with prices bouncing around, but things are looking good long term," he notes. "Also, when the economy is humming, industrials are in high demand. Think infrastructure, manufacturing, transportation – they’re all key players in keeping things moving."

Additionally, robust economic fundamentals should help stocks across the board next year.

“A stronger economy is good for all solid companies, even ones that aren't considered value stocks right now," says Paul Gabrail, founder and host of the Everything Money YouTube channel. "The goal is to increase revenue and profit; over time, the stock price and value of the company will converge.”

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