The Market Has Left GARP Behind. What Can Change That?

Current change in equity market conditions might revert investors' focus back to Growth-at-a-Reasonable-Price (GARP), one of the best performing styles longer term, according to Josh Nelson, Head of Global Equity at T. Rowe Price.

Innovation and technological upheaval, spurred by artificial intelligence’s (AI) growth as a source of profits and productivity gains, are untethering markets from their past.

There have been booms before, many with messy endings, but the belief that this AI-driven one is different has allowed noise and narrative to take over.

Imagination can lead to speculation, and the perception of winners and losers —both idiosyncratic and thematic— drives market movement.

A lottery ticket mentality is taking over for fundamental analysis. That can stretch valuations, challenge fundamentals, and temporarily widen the gap between companies that benefit from these momentum sources and those that do not.

Amid these dynamics, some left-behind companies still offer the prospect of steady earnings, cash flow, and dividend growth at a reasonable price (GARP).

These traits give them the potential to be long-term winners, and they are attractive for their tendency to grind higher and compound over time to deliver strong returns in down markets, flat markets, and even modest up markets—just not the frothiest ones¹.

So, as we see evidence of market broadening and earnings growth accelerating outside of just big tech, these forgotten GARP names stand to return to favor and be rewarded for the durable growth they’re known for.

Unprecedented risk concentration: Can it persist?

In the meantime, the market has been anything but broad. Narrow leadership, particularly concentrated among the “Magnificent Seven” (Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla), hasn’t been completely unjustified.

Most have strong fundamentals and are not optically expensive.

But their growth has led to levels of concentration and other characteristics consistent with the peaks of two other extended growth bull markets, both of which ultimately reversed sharply: the “Nifty Fifty” market of the late 1960s and early 1970s, and the 1999–2000 run-up before the internet bubble burst.

The information technology sector in the S&P 500, plus the Magnificent Seven names not included in that cohort (Alphabet, Meta Platforms, and Tesla), accounted for 59.2% of the indexes’ predicted beta as of June 30.

The top 10 constituents account for 47.2% of the index’s beta. That peaked at 49.8% at the end of 2024. Before its current run, the highest level of predicted beta concentration in the index was 35.8%, reached in March 1966. At the turn of the century, it peaked at 32.9%.

Several other data points are consistent with the previous two extended growth bull peaks, as represented by the S&P 500^2, including:

• The weight of constituents with a trailing 12-month free cash flow/enterprise value ratio below 3% (59.7% as of June 30, down from 65.5% at year-end);
• The weight of companies with below a 2% dividend yield (76.3%);
• And the weight of companies in the index with a 35x or higher trailing 12-month price/earnings ratio (42.1%).

None of this, to be clear, is to suggest that we’re calling a top on the current regime. We think there’s still room for this market to run, but would note the unique circumstances that have both led to the current market winners and taken up much of the oxygen that could have gone to GARP companies.

While there have been signs of broadening recently, since the pandemic, earnings growth has been concentrated in tech and the Magnificent Seven.

The extent that they’re being rewarded with multiple expansion, however, does not always adequately reflect the fundamentals of the individual companies or the risk associated with the extended valuation and market concentration associated with these valuations.

What’s causing the extended valuations?

The speculative nature of these valuations has many drivers. One is simple excitement around AI and its perceived benefits, with network effects and intense capital expenditure requirements for its buildout creating a system where the biggest, most successful companies can invest and widen their competitive moats.

This has led to increased concentration at the top of the market. Further down the capitalization spectrum, it sparked investor demand for more speculative and lower-quality companies, particularly those levered to in-favor themes such as AI, quantum computing, and space technology.

The rise of passive investment exacerbated these trends. Since the start of 2007, passive assets have grown US$5.14trn; actively managed assets are down US$3.35trn in the same period for equities.

Whether small-caps or large-caps, as companies’ weightings grow in their respective benchmarks, those stocks must be purchased by passive funds tracking them, further bidding up prices.

The same goes for thematic passive funds, which basket companies levered to similar themes—and they’re all growing.

Meanwhile, retail investors have also taken share from institutional investors, pushing recently to all-time highs³. 

This means, broadly, that a more risk-tolerant, short-term market participant who is focused less on fundamentals and long-term returns is influencing markets and driving up valuation in companies and making factor moves in the market more pronounced.

These changes feel durable and, in this case, create dislocations where momentum and narrative drive the market.

And to this point, there haven’t been any meaningful deterrents to change market patterns and cause any of these GARP names to receive the attention that we believe their fundamentals or durable growth characteristics suggest they should.

GARP investing, at its core, is about quality, and paying a fair price for it.

There’s no denying the quality of many of the winners at the heart of the AI ecosystem, like NVIDIA and Microsoft at the top of the market, even if some down-cap winners don’t fit that definition.

The reality is that only the market’s thematic winners are being treated like quality growth assets, and in both large-cap and SMID (small/mid-cap) names, the trends propelling markets in terms of themes and participants aren’t recognizing what GARP can bring to a portfolio, both now and if market conditions change.

GARP’s path back to favor

In this decade, we’ve seen that reversals in market sentiment can be swift, if not always enduring. When monetary policy appeared set to shift at the end of 2021 toward a rising-rate regime, the ensuing growth sell-off lasted for a full year, only reversing when AI started to spread.

More recently, both DeepSeek’s launch of a lower-cost AI platform in early 2025 and concerns over global tariff implementation pulled markets down in the first quarter of 2025, with high-momentum, high-beta, and high-volatility baskets underperforming for the period.

It doesn’t need to be a full market reversal that will bring GARP back into favor. We expect broadening to occur going forward, with the spread of earnings growth between the Tech+* and ex-tech sectors of the S&P500 Index at the end of September at its narrowest since the first quarter of 2023⁴.

This could bring some investor focus back to the attractive qualities that GARP names boast. They’re well-managed and high-quality companies with cash-generative business models, durable moats⁵ and compelling growth outlooks across a variety of sectors.

Up-cap, these companies have not derated, nor have they participated in the market’s recent run-up. Such opportunities feel particularly favorable in health care, where regulatory and policy headwinds combined with cyclical demand factors have discounted the prospects of high-quality businesses that can grow at attractive rates for the foreseeable future and benefit from AI.

In industrials, U.S. manufacturing purchasing managers’ index (PMIs) has been in contraction for an extended period, suggesting that some high-quality industrials that trade at undemanding valuations could be coiled springs if the capital spending wave broadens.

Stumbles from the more extremely valued companies down-cap —where quality is historically cheap relative to large-caps— would similarly bring investors back to profitable companies that have had steady top-line growth and the potential to compound over time.

In the SMID space, having a unique view on secular growth and a focus on companies with a long track record of execution and durable moats that we think can stand the test of time and disruptive innovation is key.

This applies to software companies serving specific, highly regulated end markets; potential AI beneficiaries in the health care space that own their own data and can create new products for a loyal installed base; companies selling into the recovering pharmaceutical and life sciences space; and consumer franchises.

Long-term winners take many forms, and various market leaders are using the spoils from their near-term success to invest in AI and leave competitors behind. History has shown GARP stocks to be long-term winners, too.

We believe there’s a place for them in every portfolio—and with manifold scenarios for the cohort to return to favor, these left-behind, historically compounding growers have the potential to be a source of ballast if market conditions change.

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