US technology stocks have declined for three consecutive months, making long-neglected value stocks appear comparatively robust. Wall Street widely believes this transition is merely in its initial stages.
Since early November through Tuesday, the Russell 1000 Value Index (RLV) has climbed 8.6%, outperforming its growth counterpart by 14 percentage points. Historically, similar outperformance has often preceded further strength in value stocks relative to growth stocks.
However, a shadow looms: the value index's last two instances of such significant outperformance over growth stocks within comparable periods occurred during the 2022 bear market plunge and the initial phase of the 2001 dot-com bubble burst.
Wall Street strategists concurrently warn that the era dominated by tech giants may be concluding. Tuesday's market dynamics laid this bare, as a software stock rout triggered broad tech sell-offs—technology stocks hold the heaviest weight in growth indices—while the RLV index hit a record closing high.
Simultaneously, as investors sought companies poised to benefit from anticipated economic growth, shares of consumer staples manufacturers, energy producers, and mining firms all advanced.
By 10:48 AM New York time Wednesday, value stocks were up 0.5%, whereas shares of growth-oriented companies had fallen 0.6%.
CFRA analyst Sam Stovall noted weeks ago that large-cap growth stock trades appeared "overcrowded." Since then, value stocks' performance advantage over tech giants has continued to widen.
Andrew Greenebaum, Senior Vice President of Equity Research Product Management at Jefferies, believes this rotation may just be beginning.
"Value has rallied strongly versus growth recently, but if you look back further—even just to the start of the Fed's last hiking cycle—value still has considerable room to outperform," Greenebaum stated.
This is because a value stock revival has been brewing for years. Over the past decade-plus, the sector consistently underperformed, particularly during bull markets propelled by technology stocks.
In a report dated January 31, Greenebaum pointed out that even after three months of gains giving value stocks an advantage on a 52-week rolling basis, the current dynamic between value and growth has "only returned to neutral." He added that, observing long-term trends, periods of "value leadership" typically outperform by over 10%.
Reviewing historical cycles marked by Jefferies analysts, Greenebaum noted that "value leadership" phases mostly emerged during reversionary adjustments around recessions or during strengthening economic cycles with accelerating GDP growth.
Wall Street economists generally anticipate that US economic growth will accelerate in 2026, spurred by a more relaxed regulatory environment, clearer trade policies, and potentially stimulated investment activity.
Doug Beath, Global Equity Strategist at Wells Fargo Investment Institute, highlighted that since late October, investors have been flocking to cyclically weighted benchmark indices, often at the expense of large-cap growth stocks.
During the S&P 500's three consecutive years of double-digit gains, numerous growth stocks saw valuations soar, while value stocks have recently returned to market focus.
Tommy Garvey, Investment Strategist at GMO's Asset Allocation team, stated this has created a "chasm" in relative valuations between the two groups, making value stocks "extremely attractive."
This shift has been long in the making. Garvey noted that over the past 15 years, growth stocks outperformed value stocks by an average of 7 percentage points annually. Market enthusiasm for "extraordinary future potential" drove growth stocks higher but may also become a hindrance.
However, with valuation expansion and strong earnings growth already priced in, Garvey pointed out, "even very good outcomes can disappoint, leading to downward repricing of growth stocks."
"In contrast, value stocks, suffering from a lack of enthusiasm, have lagged for a long time. With reasonable valuations and low expectations, even mediocre corporate performance leaves room for share price appreciation," he added.
Greenebaum suggested that market expectations for further interest rate cuts and changes to capital expenditure accounting standards could theoretically provide tailwinds for businesses closely tied to the economic cycle. Such companies are more concentrated in the value segment than the growth segment.
Even if investors aren't entirely pessimistic about tech giants and the AI sector, the outlook for value stocks remains optimistic. Greenebaum believes value's outperformance doesn't necessarily have to come at the expense of growth stocks. It doesn't mean AI stocks "don't work," but is "more about relative returns."
"If deploying new capital, investors might perceive fewer opportunities in AI, while other themes are gaining appeal, essentially competing for these fresh funds," Greenebaum explained.
Yet, a powerful reason to question the sustainability of value's lead remains: earnings growth. Bloomberg-compiled data shows value stocks are projected to achieve only a 6.4% earnings increase in 2026, far below the 27.1% growth anticipated for growth stocks.
Noah Weisberger, Chief US Equity Strategist at BCA Research, noted that as the bull market matures, equity market returns are expected to be more modest this year. He believes that in this environment, price gains will depend more on earnings growth than on valuation expansion.
"While valuations are poor predictors of short-term market direction, relative valuations often provide reliable rotation signals," Weisberger stated. "As earnings growth converges and market breadth improves, some convergence between lagging and leading valuation sectors is likely, but a complete overhaul of sector leadership is improbable."
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