A rotation into value stocks could grow stronger in the new year
A rotation into value stocks could grow in popularity in the new year. Value stocks — businesses that are priced cheaply by the market — have underperformed in all of 2025, but have enjoyed a late-year resurgence. As of Tuesday, the iShares Russell 1000 Value ETF (IWD) has outperformed this month and this quarter, up 0.8% and 3.9%, respectively. By comparison, the iShares Russell 1000 Growth ETF (IWF) has gained 0.6% and 2.3% over the same period. Value could continue to do well next year. While the S & P 500 is expected to post yet another double-digit advance in 2026 , gains are expected to be more difficult. Investors who worry the bid in artificial intelligence names since late 2022 could end in a burst bubble, are searching for cheaper assets with less risky profiles. “A lot has kind of changed over the last few weeks,” said Justin Bergner, portfolio manager at Gabelli Funds. “And in terms of next year, I do think it continues to be supportive for a further rotation to value.” A broadening rally is considered healthy for the market. Instead of gains led by just a handful of hyperscalers, broad swaths of non-technology stocks have led the market in December. The S & P 500 and financial stocks hit an all-time high just Tuesday, and small caps did the same earlier in the month. The equal-weighted S & P 500 is beating the cap-weighted index. The broader universe of stocks doesn’t have the same panache as the market’s biggest artificial intelligence plays, but the outperformance of these sectors in December signals that the bull market remains sustainable, for now. Value’s recent leadership has also led some investors to predict a “value rebound.” Conditions are certainly ripe for a comeback. If the Federal Reserve lowers interest rates in the first half of 2026 and AI boosts worker productivity, coupled with tax cuts in the Trump administration’s One, Big, Beautiful Bill Act, the combination could boost bottom lines for an array of companies that have sat out the AI rally. “A higher speed limit on growth because of productivity means the economy can [grow] at 2.5% real without inflation being a problem. That is a tailwind for fundamental factors (GARP, Value, Earnings Growth, Earnings Momentum) and procyclical equities,” Dennis DeBusschere, chief market strategist at 22V Research, wrote in a note this month. “That’s been a central theme of ours in 2025 and looks set to continue.” Banks and consumer discretionary stocks are two ways to play this theme, he added. To be sure, investors will have to discern which cheap stocks stand to gain the most in the coming year. Small caps, for example, are cheaply valued, trading at a 27% P/E discount to large caps, according to the Leuthold Group. But cheap valuations alone don’t necessarily herald outperformance. “We use valuations not as a timing tool, but more as a risk profile for the index,” said Phil Segner, co-portfolio manager for the Leuthold Grizzly Short Fund. “So, yeah, the average stock out there in our universe right now, we would say, carries a lot less risk. However, that makes no guarantee that they’re going to outperform this year, next year.” Which simply means, what specific stocks will do well is also sure to depend on what happens with the entire market.
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