A possible shift towards value stocks is gaining traction as the new year approaches, following a period of underperformance throughout 2025. Value stocks, which are typically undervalued by the market, have recently experienced a resurgence late in the year. Notably, the iShares Russell 1000 Value ETF (IWD) has shown an uptick in both December, with a rise of 0.8%, and in the quarter, increasing by 3.9%. In contrast, the iShares Russell 1000 Growth ETF (IWF) reported gains of 0.6% and 2.3%, respectively, during the same timeframe.
Looking ahead, there are indications that value stocks may continue to thrive. Analysts speculate that the S&P 500 could see another substantial double-digit increase in 2026, although the path to these gains may be more challenging. Concerns about a potential bubble bursting among artificial intelligence (AI) stocks, which have surged since late 2022, are prompting investors to seek out lower-risk, cheaper assets.
Justin Bergner, a portfolio manager at Gabelli Funds, observed a shift in the market landscape, suggesting that this change could support a continued move towards value investing. The recent broad market rally is viewed as healthier than previous trends that relied heavily on a few technology giants. As financial stocks and the S&P 500 reached new all-time highs just recently, small-cap stocks also made significant gains.
The better performance of a broader range of stocks, as evidenced by the equal-weighted S&P 500 outperforming its cap-weighted counterpart, indicates that the current bull market may remain strong. This trend suggests a potential “value rebound,” with various factors contributing to favorable conditions for value stocks in the coming year.
If the Federal Reserve were to reduce interest rates in the first half of 2026, alongside a boost in worker productivity driven by AI advancements and possible tax cuts from the previous administration’s initiatives, many companies outside the AI domain could see their earnings improve. Dennis DeBusschere, chief market strategist at 22V Research, highlighted that heightened productivity could allow the economy to grow at a 2.5% real rate without triggering inflation, benefiting value-driven factors and procyclical equities.
Financial and consumer discretionary sectors are emerging as potential avenues for investors looking to capitalize on this theme. Nonetheless, discerning which undervalued stocks are most likely to perform well will be crucial. Small-cap stocks, for instance, are currently trading at a significant 27% price-to-earnings (P/E) discount compared to larger companies, according to research from the Leuthold Group. However, low valuations do not guarantee outperformance.
Phil Segner, co-portfolio manager for the Leuthold Grizzly Short Fund, noted that while a sizable portion of the current stock universe appears to carry less risk, this does not assure superior performance in the upcoming year. The performance of specific stocks will be significantly influenced by broader market trends, underscoring the complex dynamics that investors must navigate as they make their strategies for the year ahead.
