Is the technology cycle creating a set up for a comeback in value stocks?

The AI revolution has Wall Street buzzing. Companies like NVIDIA , Palantir and Tesla have seen their stocks soar, and tech giants are racing to integrate ChatGPT-like capabilities and Artificial Intelligence at large into their products and Services. But amid this tech euphoria, we are noticing an interesting pattern that could signal a major market shift ahead.

For the past decade, Growth has been the clear winner. Tech-focused growth stocks have dominated the market, with the likes of Apple, Amazon, and Tesla delivering eye-popping returns. Meanwhile, value stocks – think energy companies, banks, and manufacturers – have mostly sat on the sidelines.

For years there have been periods where Tactical Allocation shifts have paid major dividends. There may be another trade upon us soon. The incoming Trump Administration policies that are making headlines are the ones that are most "Silicon Valley" and Innovation friendly, and that makes sense given whom he has as advisors. Interestingly, the new tech cycle actually has much more "manufacturing" than the ones in the recent past. This is not all about software and Social Media. This time the tech cycle is premised on High Performance Compute and...Chips! But, it is also clear that Trump, who built his wealth as a Real Estate mogul is not shy about his love for Oil & Gas and US led manufacturing. Additionally, the current geopolitical alignment that has evolved clearly supports his more Nationalist agenda. Finally, the President-elect's idea of trading Income Tax revenue for Tariff revenue for the USG will also drive American Investment of all kinds...especially manufacturing! All of this creates a set up favorable for some "old school" value opportunities. Oh, and let's not forget that these areas are also the cheapest in the markets! While markets Indices are not cheap, we are still finding opportunity not only in Growth...but now Value! The Russell 1000 Growth Index has consistently outpaced of the Russell 1000 Value Index to such an extreme that there are now overlooked opportunities in Value. We think Value stocks could join the party soon.

Value stocks have suffered for many reasons, most of them macro-economic, a new effort to reallocate resources in the US based upon Political ideology not economic efficiency driving slow economic growth, severe regulatory pressures, and sector-specific issues like the energy transition have all weighed on their performance.

However, for an important period in late 2020, a shift began to emerge. The "Covid crash" that led to more misallocation of resources, over spending resulting in rising inflation and interest rates created massive headwinds for growth stocks whose valuations rely heavily on future cash flows. At this time Value stocks started to outperform, bolstered by strong performance in energy, healthcare, and consumer staples amid the Covid-19 economic uncertainty and geopolitical tensions. These factors contributed to value stocks outperforming growth stocks by over 20% in 2022 and lasted into early 2023.

Despite a challenging macroeconomic environment in previous years, growth stocks regained momentum in 2023 and 2024, driven by the renewed tech cycle, falling inflation, stabilizing interest rates, and transformative technological innovations like artificial intelligence. Resilient corporate earnings and robust demand in sectors such as semiconductors further fueled their outperformance, while improving market sentiment encouraged a shift toward riskier assets.

We believe that the recent tsunami of innovation, catalyzed by OpenAI’s ChatGPT release and the development of other Large Language Models (LLMs), is expected to continue for the next few years. However, we are attempting to draw a distinction between the Technology cycle that we strongly endorse and the cyclical nature of market preferences. This market phenomenon suggests that the cycle may begin to favor Value stocks for a time. They could eventually begin to attract capital as the benefits of this recent technology wave such as the ramp in productivity seeps into corporate America and the economic impacts of it feed through. This cyclical dynamic underscores the importance of our deep research into the technology ecosystems and identifying not just the primary (and obvious) beneficiaries but also the derivative effects of that innovation. This method leads us to actively balance the types of opportunities we seek and find.

What Are Growth and Value Stocks?

Growth and value stocks represent two foundational investment strategies, each with distinct characteristics and historical significance. These styles have shaped investment philosophies for decades and remain central to portfolio management. Here’s an exploration of their definitions, historical evolution, and representation through major indices.

Key Indices Tracking Growth Stocks:

S&P 500 Growth Index: Tracks companies in the S&P 500 with higher growth potential.
Russell 1000 Growth Index: Covers large-cap growth stocks in the U.S. market.

Key Indices Tracking Value Stocks:

S&P 500 Value Index: Represents the value-oriented segment of the S&P 500.
Russell 1000 Value Index: Tracks large-cap value stocks in the U.S. market.

The Growth vs. Value Debate: A Tale of Two Investment Strategies

The debate between growth and value investing has been a defining feature of modern financial markets, representing two distinct philosophies that cater to different investor priorities and economic conditions. The relative dominance of each style fluctuates over time, shaped by market sentiment, macroeconomic trends, and investor behavior. Growth stocks tend to thrive during periods of economic optimism and low interest rates, as their future earnings potential attracts attention. Conversely, value stocks often rise to prominence in times of economic uncertainty, higher interest rates, or after market corrections, offering stability and opportunities to invest in undervalued assets.

This cyclical relationship highlights the dynamic interplay between market conditions and investment strategies. Below is a historical overview of how these cycles have vacillated between styles:

Early Foundations: Value investing originated during the Great Depression of the 1930s with Benjamin Graham's Security Analysis, emphasizing the purchase of stocks trading below their intrinsic value. This approach appealed to investors seeking stability in turbulent times. Growth investing emerged later, gaining traction in the mid-20th century as industries like technology and consumer goods began to expand rapidly.
Post-War Prosperity: Following World War II, the global economic boom spotlighted growth stocks. Companies such as General Motors and IBM epitomized this era, as their rapid expansion and focus on future earnings potential made growth investing synonymous with innovation and economic progress.
Dot-Com Era (1990s): The 1990s marked a dramatic shift toward growth investing, driven by the internet revolution and investor enthusiasm for technology stocks. However, the dot-com bubble burst in 2000 led to a sharp correction and renewed interest in value stocks as markets stabilized.
2008 Financial Crisis and the 2010s: The aftermath of the 2008 financial crisis saw central banks implement low interest rates and accommodative monetary policies, creating a favorable environment for growth stocks. Technology giants like Amazon, Apple, and Google thrived, while value stocks struggled, particularly in sectors like energy and financials that faced structural challenges.
2020-2022: The COVID-19 pandemic initially extended growth stocks’ dominance as digital transformation accelerated. However, rising inflation and interest rates in the years following 2020 shifted the spotlight back to value stocks in 2022, particularly in sectors such as energy and consumer staples, as investors sought resilience in a volatile market.
2023-2024: Growth stocks rebounded in 2023 and 2024 due to declining inflation, stable interest rates, and advancements in technology, including AI. Strong corporate earnings, high demand in sectors like semiconductors, and improved market sentiment further boosted performance, prompting a shift toward riskier assets.

This historical perspective underscores how growth and value investing have cycled through periods of dominance, with their appeal constantly redefined by shifting economic landscapes and market dynamics.

The annual performance (below) of the two major indices — the Russell 1000 Growth Total Return Index and Russell 1000 Value Total Return Index —illustrates their historically cyclical dynamic. However, the noteworthy development we have are highlighting has emerged: the prolonged outperformance of growth stocks in recent years, signaling a potential paradigm shift in market dynamics. Historically, growth and value stocks alternated in dominance over cycles lasting 2–3 years, influenced by economic and market conditions. Yet, the sustained leadership of growth stocks over the past decade raises important questions about structural changes in the economy and evolving investor behavior.

The key factors that have driven the shift to Growth over the past two decades include:

Technological Innovation:
Over the past two decades, the rapid advancement and integration of technology have transformed industries, with companies like Apple, Amazon, Google, and Microsoft becoming dominant forces in the market. These firms have delivered consistent growth and reinvested earnings to sustain innovation, making them attractive to investors seeking long-term capital appreciation. We expect this wave to continue and broaden out further. But, the beneficiaries of this wave will spread to buyers of the technology, not just the purveyors.
Low Interest Rate Environment:
Following the 2008 financial crisis, central banks globally adopted historically low interest rates and quantitative easing policies. This environment disproportionately benefited growth stocks, as the cost of capital was low, enabling growth companies to expand aggressively. Additionally, the present value of future earnings—critical for growth stock valuation—was amplified under these conditions.
Shift in Investor Preferences:
The rise of passive investing through ETFs and index funds has funneled significant capital into market leaders, many of which are growth-oriented. This trend, combined with investors increasingly prioritizing high-growth sectors like technology and healthcare, has amplified the disparity between growth and value stock performance.
Structural Headwinds for Value Stocks:
Value stocks, often concentrated in traditional sectors like energy, financials, and industrials, have faced persistent challenges. These sectors are more vulnerable to economic cycles, regulatory changes, and structural shifts such as the transition to renewable energy and digital banking. The advent of applied AI in industrial, Financial and more capital intensive industries along with the renewed effort by the new Trump administration to build our manufacturing base at home, may drive efficiencies and thus margin improvement in this arena that we have not seen in years.
The Digital Economy:
The COVID-19 pandemic accelerated the digital transformation across sectors, further cementing the dominance of growth-oriented technology companies. As businesses and consumers adapted to a digital-first environment, companies driving this transformation attracted significant investor interest.
Globalization and Intangible Assets:
Growth companies often leverage intangible assets such as intellectual property, brand value, and software. These assets have become more critical in a globalized, tech-driven economy, creating a sustained competitive advantage for growth stocks.
Profitability of Modern Growth Stocks:
A notable shift in recent years is the emergence of highly profitable growth companies, challenging the traditional view of growth stocks as speculative ventures prioritizing expansion over immediate returns. Historically, growth stocks were associated with companies willing to operate at a loss to capture future market share. Today, many of the world's most dominant companies are indeed these growth stocks—such as Apple, Microsoft, Tesla, Amazon and Alphabet—not only maintain rapid expansion but also generate consistent and significant free cash flow and profits, reshaping investor perceptions and reducing the risks associated with growth investing.

The Tide May Be Turning

But here's where it gets interesting. The Trump Administration that will be taking power in a matter of weeks may be the catalyst for these changes...just as we are seeing some extreme divergences. History shows that when growth stocks become too expensive compared to value stocks (specifically, when their price-to-earnings ratio spread exceeds 8), the tables often turn. Right now, we're seeing exactly that pattern emerge.

The relative performance of Growth and Value stocks when the Forward P/E spread widens is a key metric. Historically, a wider spread has often signaled a higher likelihood of Value stocks outperforming Growth stocks over the subsequent 2–3 years, and, in some cases, for even longer durations.

The threshold of 8 appears to be the critical level for the Forward P/E spread (see below). When the spread surpasses this level, Value stocks tend to outperform Growth stocks. Furthermore, as the spread widens beyond 8, the subsequent 3-year performance of Value stocks becomes increasingly robust- we are there now! This pattern indicates that high valuations of Growth stocks are now presenting potentially relatively undervalued mean reversion opportunities for Value stocks. Importantly, Value tends to benefit from market corrections and Bear Markets.

The historical interplay between value and growth stocks highlights the cyclical nature of market preferences, shaped by macroeconomic cycles & conditions, interest rates, and investor sentiment. With inflation stabilizing but interest rates remaining elevated—and markets pricing in a higher for longer level than initially anticipated—the focus has shifted toward value stocks. These stocks, particularly in sectors like energy, materials, healthcare, and consumer staples, are well-positioned to perform in such an environment due to their strong fundamentals and ability to deliver consistent returns amid tighter financial conditions. Moreover, the rise of artificial intelligence, widely seen as a driver of growth stocks, adds a transformative layer to this dynamic. AI applications in operational efficiency, cost reduction, and strategic decision-making are increasingly benefiting value stocks as well. This shift not only highlights AI's potential to drive innovation and boost margins but also underscores its ability to reinforce the stability that defines value investing.

Our renewed interest in value stocks underscores their key role in investment strategies. Historical data show that periods of relative undervaluation often precede value stock outperformance, especially during times of sustained high interest rates. As investors seek stability and reliable income, value stocks currently present a compelling opportunity for long-term portfolio diversification and growth.

The insights drawn from these observations are rooted in historical data and established patterns, but the future remains inherently uncertain. Market dynamics are influenced by a myriad of unpredictable factors, including technological advancements, geopolitical events, and changes in consumer behavior. It is important when times are good to consider hedges against volatility and positions that may benefit from a wider range of market outcomes. This type of tactical periodic diversification can create a sound aspect of risk management in an investment strategy.

We're likely entering a period where both growth and value strategies can thrive. The AI revolution isn't just about tech companies – it's transforming value stocks too. The winners won't only be the companies creating AI technology, but also those using it most effectively to improve their businesses.

Research led by Anton Perminov, Research Analyst