Is the "value rotation" in the US stock market ringing alarm bells? Wall Street: It's just the beginning, similar to the early stages of the dot-com bubble burst!

U.S. technology stocks have fallen into a three-month downturn, making value stocks, which have performed poorly over the long term, appear relatively strong. From early November to Tuesday, the Russell 1000 Value Index (RLV) has risen 8.6%, outperforming its growth benchmark index by 14 percentage points.

Wall Street generally believes that the rotation is just beginning, and the era dominated by large tech companies may be coming to an end. Tuesday’s market action also confirmed this shift: a sharp decline in software stocks triggered a broad sell-off in tech stocks (which have the highest weight in the growth index). In stark contrast, the RLV index hit a new all-time high.

However, there’s even worse news: historically, RLV has only significantly outperformed growth indices twice over similar periods—during the 2022 bear market crash and the early days of the 2001 dot-com bubble burst. Moreover, after such notable excess returns, value stocks tend to continue outperforming growth stocks.

The rotation has just begun

In fact, CFRA analyst Sam Stovall wrote weeks ago that trading in large growth stocks has become “out of sync.” Since then, the relative performance advantage of value stocks over tech giants has continued to widen. Andrew Greenebaum, Senior Vice President of Stock Research Product Management at U.S. Wealth Financial Group, said this rotation may have just started.

“Recently, the gains in value stocks relative to growth stocks have been quite substantial, but if you extend the timeline—even just back to the start of the Fed’s last rate hike cycle—there’s still significant excess return potential for value stocks,” Greenebaum added.

This is because the revival of value stocks has been brewing for some time. Over the past decade, value stocks have underperformed the broader market, especially as tech stocks drove the bull market.

A recent J.P. Morgan report pointed out that even after the past three months’ rally and the resurgence of value stocks, their relative performance over a 52-week rolling period has only returned to neutral. From a long-term perspective, “value outperformance” phases typically deliver over 10% excess returns.

J.P. Morgan analysts, after analyzing historical data, found that “value outperformance” mostly occurs during valuation recovery periods after recessions or during phases of economic strengthening and accelerated GDP growth. Wall Street economists generally expect that with deregulation and clearer tariff policies, U.S. economic growth will accelerate by 2026, boosting investments.

Value/Technology

According to Doug Beath, Global Equity Strategist at Wells Fargo Investment Institute, since late October, investors have been pouring into cyclical weight indices, while large-cap growth stocks have been the main outflow. The renewed interest in value stocks comes amid three consecutive years of double-digit growth in the S&P 500 and a bubble in the valuations of many growth stocks.

Tommy Garvey, Portfolio Strategist at GMO Asset Allocation Team, believes this has created a “gap” in relative valuations between the two types of stocks, making value stocks “highly attractive.”

Greenebaum also pointed out that expectations of further rate cuts and changes in capital expenditure accounting standards could, in theory, benefit companies closely tied to the economic cycle. These companies are more concentrated in the value stock sector than in growth stocks.

Moreover, even if investors are not entirely bearish on tech giants and AI sectors, the outlook for value stocks remains optimistic. Greenebaum believes that the strong performance of value stocks does not necessarily come at the expense of growth stocks. This is not to say that AI stocks are “not viable,” but rather that it’s “more about relative returns.”

“If you have new funds to allocate, the appeal of the AI track seems to be waning, while other themes are becoming increasingly attractive—essentially competing for incremental capital,” he added.

(Article source: Cailian Press)