A three-month plunge in US technology stocks has made long-suppressed value shares appear comparatively resilient. A growing consensus is forming on Wall Street that this sector rotation is only just beginning. Since early November, the Russell 1000 Value Index (RLV) has climbed 8.6%, outperforming its growth-stock counterpart by 14 percentage points. Historically, outperformance of this magnitude often signals that value stocks are poised for further gains relative to growth stocks. However, this development carries underlying concerns: the two most recent instances of the value index significantly outperforming the growth index over a similar timeframe occurred during the 2022 bear market crash and the initial phase of the 2001 dot-com bubble burst. Wall Street strategists are now issuing warnings that the era of large-cap tech stocks dominating the market may be nearing its conclusion. This shift was starkly evident on Tuesday: a sharp decline in software manufacturers triggered a broad sell-off in tech shares—which carry dominant weight in the growth index. In contrast, the Russell 1000 Value Index closed at a record high. Concurrently, as investors flock to companies expected to benefit from improving economic growth prospects, shares of essential consumer goods manufacturers, energy producers, and materials miners are advancing. Weeks ago, Sam Stovall, Chief Investment Strategist at CFRA Research, noted that large-cap growth stock trades had begun to appear "anachronistic." Since that observation, value stocks have extended their lead over big tech. Andrew Greenebaum, Senior Vice President of Equity Research Product Management at Jefferies, believes this rotation may still be in its early stages. "Value stocks have recouped significant ground relative to growth stocks recently, but when viewed over a longer horizon—even just back to the start of the Fed's previous rate-hiking cycle—there remains substantial room for further outperformance," Greenebaum stated. This is because a value stock resurgence has long been anticipated. For over a decade, particularly during a bull market driven by tech shares, value stocks have consistently lagged. In a Jefferies report dated January 31, Greenebaum pointed out that even after three months of gains leading to a peak, the performance of value versus growth stocks on a rolling 52-week basis "has only returned to neutral." He added that, from a longer-term perspective, periods of "value leadership" have typically involved relative outperformance exceeding 10%. Reflecting on historical periods marked by Jefferies analysts, Greenebaum noted that "value leadership" often emerges during mean reversion around economic recessions or during cyclical strength accompanied by accelerating GDP growth. Leading Wall Street economists project an acceleration in US economic growth by 2026, anticipating that regulatory easing and clearer tariff policies will stimulate investment. Doug Beath, Global Equity Strategist at the Wells Fargo Investment Institute, indicated that since late October, investors have been moving into indices with higher weightings in cyclical stocks, often at the expense of large-cap growth shares. The return of value stocks to the spotlight coincides with a period where substantial growth stock valuations have been pushed higher after three consecutive years of double-digit gains in the S&P 500. Tommy Garvey, Portfolio Strategist on the GMO Asset Allocation team, stated that this has resulted in a significant "chasm" in relative valuations between the two sectors, making value stocks appear "highly attractive." This transition has been brewing for some time. Garvey mentioned that over the past 15 years, growth stocks have outperformed value stocks by an average of 7% annually. The pursuit of "remarkable future potential" has played a role in driving growth stocks higher—but this could also become a hindrance. However, Garvey pointed out that with elevated valuations and strong profit growth already priced in, growth stocks "could disappoint investors even with very strong performance, leading to downward price repricing." "Conversely, the subdued market interest in value stocks has left them significantly lagging, but their reasonable valuations and low market expectations create room for price appreciation even with only modest corporate earnings performance," he added. Greenebaum cited expectations for further interest rate cuts and changes to capital expenditure accounting standards as favorable factors. Theoretically, these should benefit businesses whose operations are highly correlated with the economic cycle—a category far more prevalent in the value stock basket than in the growth basket. The outlook for value stocks remains positive even if investors haven't completely turned bearish on large-cap tech and AI-themed stocks. In Greenebaum's view, value outperformance does not necessarily require growth stocks to fall. It's not that AI stocks "can't rise," but more a question of "relative returns." "If you have new capital to deploy, you might perceive limited upside in the AI sector, while other themes are becoming increasingly attractive, essentially competing for these new funds," Greenebaum explained. Nevertheless, one compelling reason exists to question the sustainability of value stock leadership: earnings growth. Data compiled by Bloomberg indicates that value stock profits are projected to grow 6.4% in 2026, whereas growth stocks are expected to surge by 27.1%. Noah Weisberger, Chief US Equity Strategist at BCA Research, noted that as the bull market matures, overall stock market returns are expected to be more moderate this year. He believes that in such an environment, gains will be more closely tied to earnings growth rather than multiple expansion. "While valuations are weak predictors of short-term market movements, relative valuations often serve as reliable signals for rotation," Weisberger stated. "As earnings growth converges and market breadth improves, some degree of convergence between lagging and leading valuation sectors is likely, although a complete change in leadership is not expected."
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