By Ian Salisbury
Value is like a Rorschach test -- an inkblot that says more about you than what you're looking it. The same may be said of value stocks, especially with artificial intelligence distorting the picture.
Whatever your lens, value is on a roll. The Russell 1000 Value index is up 14% this year, compared with 5% for the Russell 1000 Growth index. A surge in energy stocks has fueled the value index. It has also become more of a tech proxy, with growth sectors playing a bigger role.
The comeback is nascent -- and would hardly be the first one to fizzle. But it could mark a turn for an investing style that has struggled for decades. Large-cap growth has returned about 13% a year on average since 2006 compared with 8.7% for value, according to FTSE Russell. Growth has led value in 14 of the past 18 years.
The shifting nature of value -- with some funds and indexes now holding far more tech and growth -- poses a dilemma. Should you go with a fund sticking to traditional value metrics like price-to-book ratios? Or should you go for a fund with a more freewheeling approach -- posing more risk but offering the potential for higher returns if growthier stocks keep powering ahead?
We suggest a bit of both.
Funds that have racked up solid records by emphasizing tech should continue to outperform in tandem with the AI buildout. The risk is that higher-multiple stocks will go down harder in a tech-led selloff.
Conversely, deeper value funds should shine if the sheen comes off the AI bloom. These funds can be defensive by emphasizing dividend payers and sectors such as healthcare and consumer staples.
There is also something to be said for historical patterns taking hold; funds sticking to core principles of value have more than 100 years of market data in their favor. They also have icons like Warren Buffett in their camp (though Buffett himself made a big winning bet on Apple and other tech-related stocks like Amazon.com and VeriSign years ago).
What Makes for True Value?
Figuring out true value has always been subjective. AI is muddying the waters further. Tech and related sectors now account for about half the S&P 500, and just six stocks, led by Nvidia, make up 35% of the market. Value funds without as much tech are at structural disadvantage.
Complicating matters are different views of value by index providers FTSE Russell (owned by London Stock Exchange Group), MSCI, and S&P Global. The firms set the benchmarks for many actively managed funds and trillions in index fund assets.
Russell divides half the market into value and half into growth. For its Russell 1000 Value index, Russell creates a universe of stocks with lower price/book ratios, lower earnings growth, and lower historical sales growth compared with the broader market. Financials make up the largest portion of the value index, at 18%. Tech is next, at 17%, including Magnificent Seven names such as Alphabet, Amazon.com, and Meta Platforms, which were all added last year.
The upshot is that investors are getting more growth in the value index. "By splitting the market evenly between growth and value, you end up with some of these companies that people perceive as growth being in the value index," says Catherine Yoshimoto, director of product management for FTSE Russell.
A growing slug of growth in some indexes also helps explain value's recent comeback. The iShares Russell 1000 Value exchange-traded fund, for instance, now has 31% in growth, up from 3% in 2004, according to Trivariate Research. Value stocks have dropped from 52% to 25% of the ETF, with the rest exhibiting neither characteristic.
"The huge moves in semiconductor stocks have mattered a lot," says Adam Parker, CEO and founder of Trivariate.
Yet differing approaches to value are creating huge gaps in performance. The iShares MSCI USA Value Factor ETF is up 44% this year compared with 7% for the iShares S&P 500 Value ETF.
S&P emphasizes factors such as price/earnings, price/book value, and price/sales ratios, which winds up underweighting tech. MSCI weights the market by relative value in each industry or sector. More than 40% of the USA Value Factor ETF is now in tech, about three times the average value fund.
Tech, of course, is at the heart of it all. An analysis performed by Morningstar for Barron's indicates that technology stocks contributed heavily to all three funds' total returns over the past five years: about 18% for the iShares Russell 1000 Value ETF, 21% for the iShares MSCI USA Value Factor ETF, and 25% for the iShares S&P 500 Value ETF.
Where to invest depends largely on whether AI continues to carry the market. More tech-heavy value funds should outperform if that continues. But traditional value may take the lead if tech crashes, and there is precedent for that: In the aftermath of dot-com bust, value beat growth annually from 2000 to 2006.
Pushing the Envelope
While there's no consensus on value, Morningstar takes a stab with a ranking system for funds, assigning scores to them based on their underlying stocks. Value funds generally score in the 60s out of a total of 400. Funds veering deeper into value land scores at the lower end.
Parnassus Value Equity is among the highest-scoring value funds in Morningstar's matrix, meaning it's on the growthier end. Investors have been rewarded: It has returned an annualized 14.7% over the past decade, ranking in the top 2% among large value funds.
Co-manager Krishna Chintalapalli says he looks for relative value in areas such as tech, arguing that intangible assets like intellectual property aren't reflected in traditional measures like price/book ratios. "What hasn't worked is buying low P/E stocks or low price-to-book stocks and just waiting for a reversion to the mean," he says.
Alphabet and Taiwan Semiconductor Manufacturing are top holdings, partly because of their "moats," or bulwarks against competition.
Alphabet's search business is its moat, he says, pointing out that it prints cash, which helps fund the company's investment in AI. Google's success with its AI tool, Gemini, has helped alleviate fears that search revenue would tank as users migrate to "generative" search using AI bots. Gemini also gathers user and search data that feeds advertising revenue for YouTube, Gmail, and traditional search.
Alphabet's stock has rallied as its AI business took off, but it's still worth holding, Chintalapalli says. Though it's no longer cheap at 25 times earnings, the company is expected to boost profits at an average 11% clip through 2030, well ahead of the market. And investors may still be undervaluing its AI business and other intangibles, he says.
Taiwan Semi's moat is its huge lead in advanced chip manufacturing; companies like Nvidia, Broadcom, Alphabet, and Apple contract with the company to make core, custom chips. A military action by China, seeking control of Taiwan, could hit the stock hard, but its relatively low multiple -- at 21 times estimated 2027 earnings -- reflects some of that risk, Chintalapalli says. "Everyone's dependent on them," he adds.
Warren Chiang, a partner at investment firm GMO, also takes an expansive view of value. "Companies that have lots of earnings power, lots of ability to generate earnings and cash flow, and aren't trading at prices that are expensive -- that's the definition of value," says Chiang.
The GMO US Equity fund, which he co-managers, has beaten 99% of rivals over the past 10 years, according to Morningstar. The minimum investment is $1 million, but Chiang also co-manages the GMO U.S. Value ETF, which trades like a stock and follows a similar approach.
The ETF sits squarely in value camp. Its P/E ratio is just 12.5. The fund also has a 2% dividend yield, about double that of the S&P 500.
While the fund owns tech stocks like Microsoft, Meta, and Qualcomm, other top names include dividend payers Exxon Mobil, Pfizer, and Verizon Communications.
Qualcomm is one of the better values in tech, Chiang says. While the stock is up 15% this year, it's still a relative bargain, with one of the lower P/E ratios among chip makers. The biggest opportunity the market is missing is Qualcomm's plans to develop phones that can handle AI tasks, he says. "With AI compute increasingly moving to the device level, the forward profitability our models are projecting looks very different from what the current price seems to embed."
Merck, another top holding, could see revenue and profits slide after its blockbuster cancer drug, Keytruda, goes off patent in 2028. Earnings are under pressure this year due to a $9 billion cash purchase of Cidara Therapeutics, a company developing a biologic flu drug.
Yet with the stock at just 12 times 2027 earnings, Chiang says the market isn't giving its drug prospects enough credit. And the Keytruda losses may be lower than what the market expects. "There's a lot of anxiety in the market about the Keytruda patent timeline, and our models suggest that concern may be overly influencing the stock price," he says.
The Comeback Kids
Dimensional Fund Advisors has a long history in traditional value. Founded in 1981 to implement ideas devised by Nobel-winning economist Eugene Fama, the firm emphasizes core value principles like low price-to-book and smaller size, reflecting academic research showing that those measures are associated with superior long-term returns.
The approach hasn't changed much in decades, says Wes Crill, DFA's senior client-solutions director. Whenever the firm experimented with other value measures, even if there was an improvement, "you were basically backing into more technology."
DFA's record has been mixed. The $25 billion DFA US Large Cap Value Portfolio has returned an annualized 11.6% over the past decade, in the middle of the pack. The Dimensional U.S. Core Equity 2 ETF has done better, at an average 13.6% a year. Both funds score low on Morningstar's growth/value matrix, meaning they're squarely in the value camp.
DFA uses a quantitative model to pick stocks, and declined to comment on holdings. But they're clearly in value land. Top holdings in the ETF include JPMorgan Chase, Exxon Mobil, and Johnson & Johnson. Exxon and JPMorgan trade at P/Es ratios around 14 times. Johnson & Johnson is at 20 times, largely because shares have rallied 50% in the past year while earnings estimates haven't risen as much.
Richard Pzena is also sticking to his value guns. The chairman of Pzena Investment Management, he co-manages a $100 million portfolio for institutional clients. It sits deep in value territory. The portfolio's P/E ratio is just 10.1 times forward earnings, well below the Russell 1000 Value, at 17 times. While the market's multiple has expanded over the past decade, his portfolio's P/E has actually declined.
The low P/E ratio reflects Pzena's investing style: sticking to core value stocks while largely avoiding tech. The strategy, U.S. Focused Value, has been a casualty of the AI boom and big gains for tech over the past decade. It has returned 8.5% over the past 10 years, lagging behind both the Russell 1000 Value index and broader market.
But Pzena isn't inclined to load up on tech now. Many of the stocks' earnings estimates bake in too many hypotheticals, he says, making multiples tough to justify and limiting upside. Companies in his portfolio aren't just cheap, he adds. They should also deliver returns averaging 12% a year, based on earnings growth and dividends, without factoring in multiple expansion.
Several of the stocks are turnaround plays. Health insurer Humana, for instance, is a top holding. The stock has struggled amid adjustments to Medicare Advantage reimbursements, which prompted analysts to cut 2027 earnings forecasts by more than 25%.
That's making it look pricey, at 23 times 2027 estimated earnings. But Pzena says the company should be able to trim benefits without losing market share, which would boost margins. And the stock is on the cheaper side, trading at 14 times consensus 2028 earnings estimates.
Baxter International, another holding, has faced a slew of setbacks. The medical device and pharmaceutical company is still dealing with fallout from hurricane damage to its core IV solutions plant in 2024. The firm is also grappling with supply shortages, tariffs, and long-term sales contracts that misjudged inflation.
Pzena thinks Baxter can bounce back. It has renegotiated some burdensome contracts and cut costs in its IV business to address lingering sales shortfalls. Shares trade at just 10 times forward earnings, far below the stock's 10-year average of 19 times.
Pzena is also betting the AI frenzy won't last forever, and that when it peters out, the market will reward deeper value stocks. That could happen if investors start shifting money out of tech, much like they did after the last tech boom fizzled in the early 2000s.
"When companies spend huge amounts of capital in anticipation of future needs they get carried away," he says. "Will it happen this time? There's no way I could say that. But you are betting against the odds that it's going to be different this time."
Write to Ian Salisbury at ian.salisbury@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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June 11, 2026 01:00 ET (05:00 GMT)
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