Investors may be paying too much for future growth, with stocks carrying lower growth expectations historically delivering stronger returns than those priced for aggressive expansion, according to a Morgan Stanley Counterpoint Global Insights report.

The report, titled "Opportunities and Expectations: The Present Value of Growth Opportunities in Valuation", said investors often attribute a significant portion of a company's valuation to future growth opportunities, but stocks with lower expectations have historically outperformed those with higher expectations.

Explaining its framework, Morgan Stanley said stock prices can be viewed in two parts: the value of a company's existing business and the value of future investments that create additional returns.

"The second part is the option to make investments in the future that create value. This part is called the 'present value of growth opportunities' (PVGO)," the report said.

According to the report, a higher PVGO percentage indicates that investors are placing greater faith in a company's ability to generate future value, while a lower percentage suggests more modest expectations.

Analyzing US public companies with market capitalisations of at least USD 1 billion between 1990 and 2024, Morgan Stanley found that stocks with lower growth expectations generated stronger returns over time.

"The five-year median TSR was 8.7 per cent for the quintile with the lowest PVGO percentage and 5.0 per cent for the quintile with the highest PVGO percentage," the report noted.

The study also found that the performance gap between stocks with low and high growth expectations persisted over long periods.

"The return spread is positive in about 90 per cent of the years and averages 2.6 percentage points over the full span," it said.

At the broader market level, Morgan Stanley noted that periods of elevated growth expectations have historically been followed by weaker long-term returns.

"Lower PVGO percentages are associated with higher subsequent TSRs, and higher percentages are followed by lower TSRs," the report said, referring to historical data for the S&P 500.

The report noted that, on average, future growth opportunities account for about 35 per cent of the S&P 500's valuation, while the remaining 65 per cent reflects the value of current earnings.

However, it said that by the end of 2025, the market's PVGO measure was "well above the average," indicating elevated expectations for future value creation.

Morgan Stanley also compared PVGO with the traditional value-investing approach based on price-to-book ratios. It argued that the value factor has become less effective in recent decades as intangible assets have become more important.

"The PVGO percentage seems to provide higher, and more consistent, returns. The average five-year return is 230 basis points above those of the value factor," the report said.

Summing up its findings, the report said the PVGO measure can serve as a useful complement to traditional valuation tools and may help investors better assess whether market expectations for future growth are justified.

Published on June 20, 2026