After growth stocks brought heartbreak in 2022, the growth style of investing was at the top of the leaderboard in 2023. Can the rebound continue?
February 7, 2024
By Lindsay Strickland
Painful as that year was, 2022 marked only the second year of negative
returns for the growth group since 2008; the other down year, 2018, saw a
three percent decline. Growth returns tend to go big or go home. Since
1994, growth stocks produced positive returns 80 percent of the time.
Forty-three percent of the time, the annual returns were over 20 percent,
eight years delivered positive returns over 30 percent, with only two
years down over 30 percent (rounding up last year’s decline of 29.8
percent in that calculation). This chart below shows the magnitude of the
annual occurrences over that time period.
The bar chart breaks down Russell 1000 Growth Index annual returns
over the past 30 years based on the percentage of gain or loss in that
year. The index has had positive returns in 24 of 30 years. Returns
have been greater than 20% in 13 years. Returns between 10% and 19.9%
occurred in four years. Returns between 0% and 9.9% have occurred in
seven years. One year had a negative return between -0.01% and 10%,
and there were no years with negative returns between -10.1% and -20%.
The index declined by more than 20% in five of the 30 years.
Source – RBC Wealth Management, FactSet; data through 12/31/23
The compound annual growth rate (CAGR) for the Russell 1000 Growth Index
has averaged 18 percent over the past five years. These returns may
naturally prompt the question, “What type of companies tend to be included
in this elite group, known as growth stocks, and why would an investor
stomach the wild volatility that can accompany owning them?”
Although definitions are plentiful about what constitutes a growth stock,
most growth companies would check several, if not all, of the following
With the gift of hindsight, the forces behind the pendulum of growth
returns from the 2022 correction to the 2023 rally, were in place to start
First, the year began with investor sentiment at levels as bearish as
during the worst of the 2008–2009 global financial crisis. Such a level of
extreme bearishness has always proved unsustainable and often precedes a
period of strong outperformance.
Second, growth tends to outperform value when the 10-year Treasury yields
come down. In reality, the 10-Year Treasury yield began 2023 at 3.88
percent and, interestingly, ended the year at that very same level. The
relationship is shown on the chart below.
Over the course of the year investors became hopeful as inflation cooled,
that the Federal Reserve would end its rate hike cycle and probably move
on to rate cuts in 2024. That promise of future rate declines lent more
and more valuation support to the growth contingent throughout the year.
So too did the very strong arrivals of Artificial Intelligence (AI) and
Generative AI. The introduction of ChatGPT at the end of November 2022 was
like pulling a rabbit out of a hat, reigniting the Technology trade
The line chart compares the Russell 1000 Growth Index and the 10-Year
U.S. Treasury yield over the course of 2023. The 10-year Treasury
yield began the year at 3.88% and ended the year at the same level,
hitting a low of 3.29% in late March and peaking in October at 4.99%.
The Russell 1000 Index rose from just under 2,200 at the start of the
year to over 2,800 at the end of July, then moved unevenly lower to
just under 2,600 at the end of October before rising steadily to end
the year above 3,000.
Investor sentiment ended the year toward the enthusiastic side of the
spectrum, at levels where the forward returns for the overall market could
be expected to be more muted. Investors have already priced in an
expectation that many companies will sustain strong revenue and earnings
growth by exploiting AI. Consensus earnings growth expectations for the
Tech-heavy Nasdaq versus the S&P 500 are for fundamentals to
accelerate in 2024. Today, the Nasdaq forward multiple is 27.3x, and
approximately 470 basis points, or 20 percent, has been added to it since
the start of 2022. We think this valuation metric only becomes a concern
if this group of stocks can’t continue to sustain or accelerate revenue
and earnings in 2024. Those companies now need to deliver that kind of
performance in 2024.
Table showing earnings per share (EPS) and annual percentage growth for the S&P 500 and Nasdaq Composite from 2016 through 2022, and estimates through 2025.
Source – FactSet; data through 1/17/24
The Nasdaq ended 2023 advancing 43 percent, a bit higher than the Russell
1000 Growth Index. The Nasdaq is approximately 57 percent weighted with
the Technology sector. This sector’s performance surpassed the other 10 by
returning almost 56 percent this past year. History provides some insight
as to what the future may hold for growth stocks following a year of heady
double-digit returns driven by the promise of a transformative technology.
Three examples come to mind. First, the Apple computer was created in
1976. Second, Netscape became the first browser introduced and established
the World Wide Web for the masses in 1994. Third, Amazon launched Amazon
Web Services in 2006 with Apple’s iPhone arriving the following year. The
table immediately below shows the six years of consecutive Nasdaq returns
starting with the introduction of the three watershed technologies.
Source – RBC Wealth Management, FactSet
There is at least one other factor to consider with respect to growth
stock investing in 2024. The Nasdaq began trading in February 1971. There
have been 13 U.S. elections since that time, and 10 of those produced
positive returns with an average of 20 percent. The three election years
that experienced negative returns averaged a 30 percent decline. Comparing
the growth style of investing to value during these periods, data since
1980 for 11 elections shows value outperformed growth 72 percent of the
Source – RBC Wealth Management, Bloomberg; annual data 1980–2020
The Russell 1000 Growth Index has outperformed the Nasdaq, S&P 500,
and Russell 1000 Value over the past five years, and holds a top 2
position on three-year and 10-year bases. The performance dominance of
this investing style makes it a powerful tool in both portfolio
construction and investment returns. Growth stocks tend to be more
volatile and have deeper corrections as a group and, therefore, exposure
should be managed to personal risk tolerance. We think patience is
required to capitalize on both the volatility and opportunity.
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