Wall Street’s Rotation Into Value Has a Dot-Com Warning to It

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Wall Street’s Rotation Into Value Has a Dot-Com Warning to It.

stock :: 10hrs ago :: source - bloomberg

By Joel Leon

(Bloomberg) -- The three-month slump in US technology stocks has left long-downtrodden value stocks looking relatively strong. There’s growing consensus on Wall Street the shift is just getting started.

The Russell 1000 Value Index (RLV) has advanced 8.6% since the beginning of November, beating its growth counterpart by 14 percentage points. Prior periods of such outperformance have led to further gains for value versus growth.

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But there is a dark lining: The last two times the value index outperformed its growth counterpart by this much during a similar time span was during a bear market rout in 2022 and the early days of a dot-com bust in 2001.

This time also brings warnings from Wall Street strategists that the era of Big Tech dominance is likely nearing its end. The shift was on full display Tuesday, when a rout in software makers sparked a broad selloff in tech shares — the predominant weighting in the growth index. In contrast, the RLV closed at an all-time high.

At the same time, makers of consumer staples, energy producers and materials miners advanced as investors sought companies that will benefit from an expected uptick in economic growth.

The large cap-growth trade feels “anachronistic,” CFRA’s Sam Stovall wrote a few weeks ago. Since then, value has only extended its outperformance over Big Tech.

Andrew Greenebaum, senior vice president of equity research product management at Jefferies, argues the rotation may be just starting.

“Value has gained a lot of ground versus growth recently, but if you look further back – even just to the start of the Fed’s last hike cycle – there is plenty of room for outperformance,” Greenebaum said.

That’s because value’s renaissance has been a long time coming. The group has consistently underperformed for over a decade as tech, in particular, has powered bull market runs.

Even after the three month run that’s put value on top, on a rolling 52-week basis, the value and growth dynamic is “merely back to neutral,” Greenebaum said in a Jefferies note published Jan. 31. When looking at the dynamic on a longer-term basis, “pro-value” periods have seen an outperformance of more than 10%, he added.

Looking back at periods flagged by Jefferies analysts, Greenebaum noted that “pro-value” periods have mostly happened at times where there have been reversions around recessions or strength in the cycle coinciding with accelerations in gross domestic product.

Economists up and down Wall Street expect US growth to accelerate in 2026 as easier regulations and more clarity on tariffs help spark investment.

Investors have, thus, been piling into cyclically-weighted benchmarks, often at the expense of large-cap growth stocks since late October, according to Doug Beath, global equity strategist at Wells Fargo Investment Institute.

Value’s latest turn in the spotlight comes after a large swath of growth stocks saw valuations stretched during three years of double-digit gains for the S&P 500.

That created a “chasm” in relative valuations between the groups, accord to Tommy Garvey, portfolio strategist for GMO’s asset allocation team, making value “very appealing.”

The turn has been a long time coming. Over the last 15 years, growth stocks have outperformed value by an average of 7% per year, according to Garvey. The excitement over “phenomenal future potential” has played a part in propelling growth names higher — but it can also be a hindrance.

But with valuations stretched and strong rates of profit growth priced in, “even very good outcomes will inevitably lead to investor disappointment and a repricing of shares downward” for growth, Garvey said.

“Conversely, a lack of excitement about value stocks have left them languishing far behind, on reasonable valuations with low expectations, and even moderate corporate results leaves room for share price gains,” he said.

Expectations for additional interest-rate cuts and a change in accounting rules for capital expenditures are tailwinds that should theoretically benefit companies whose businesses that are tied to the economy, a group that disproportionately fills the value basket rather than growth, Greenebaum said.

The prospects for value look good, even if investors don’t outright sour on Big Tech and the AI trade. In Greenebaum’s view, value’s outperformance does not necessarily come at the expense of growth. It’s not that AI stocks “can’t work,” it’s “more like relative returns.”

“If you’re putting new dollars to work, it probably feels like there is less to play for in AI and there are other themes that are now incrementally attractive and are just basically competing for those incremental dollars,” Greenebaum said.

There remains one strong reason, though, to doubt that value’s time in front will persist: earnings growth. Value is expected to post 6.4% higher profits in 2026 compared to growth’s 27.1% anticipated advance, according to data compiled by Bloomberg.

Noah Weisberger, chief US equity strategist at BCA Research, noted expectations are for just modest equity returns this year as the bull market matures. In this environment, gains become more linked to earnings growth rather than rising valuations, in his estimation.

“While valuation is a poor predictor of short-term market direction, relative valuation tends to be a reliable rotation signal,” Weisberger said. “As earning growth converges and breadth improves, some convergence between valuation laggards and leaders, though not a wholesale change in sector leadership, is likely.”

--With assistance from Geoffrey Morgan and Matt Turner.