Value stocks have been quietly compounding gains while Wall Street's attention stayed locked on AI names.
The Russell 1000 Value Index is up roughly 20% this year, while its growth counterpart has declined 1.6%. The gap is wide and most fund managers are still on the wrong side of it.
Why value is winning right now
The rotation has a few forces behind it. Earnings growth is spreading beyond the AI leaders, a shift that has historically favored value stocks.
With profits rising across more sectors, investors have more opportunities to find growth at reasonable prices instead of paying a premium for future earnings.
The macro backdrop is reinforcing the shift. Bank of America's business cycle indicator shows the economy in expansionary midcycle for a fourth straight month.
That's a zone where value has historically delivered more consistent outperformance than growth. BofA's house view also anticipates three rate hikes in 2026, which tends to squeeze growth stocks more than value names since growth stocks rely on future cash flows that lose appeal as rates rise.
The rotation was hard to miss in July. The Nasdaq fell more than 6%, and the iShares Semiconductor ETF sank more than 26%. Meanwhile, the iShares Russell 1000 Value ETF gained more than 3.5% and is up more than 19% year to date.
Consumer staples and healthcare also gained as investors moved away from high-flying chip stocks and into cheaper corners of the market.
The index got structurally reshuffled
Part of value's outperformance traces back to a mechanical event. In June, the Russell Index reconstitution shifted Amazon, Apple, and Microsoft partially or further into the Russell 1000 Value Index.
It simultaneously moved chip names including Micron Technology and Advanced Micro Devices into the growth counterpart right as semiconductors were peaking.
"It was like the index got so lucky. It caught that blow-off top in momentum, and then sold it right before they rolled over."
Sam Peters, ClearBridge Investments
The result is a value index now dominated by megacap tech names that carry both reasonable valuations and genuine earnings power.
The Russell 1000 Value Index trades at a forward price-to-earnings ratio of 18, compared with 26 for the growth index. That spread is where investors are currently hunting.
Where the positioning is most lopsided
Fund managers haven't caught up to the shift. BofA data shows record underweight positions in financials among actively managed funds, with light exposure across other value segments. That positioning gap means the trade has room to run as institutional money rebalances.
BofA's screen of stocks with top-quintile five-year earnings-per-share growth projections includes a heavy concentration of financials and healthcare names.
Citigroup leads the group with projected EPS growth of 23%, followed by AbbVie at 21.6% and KKR at 21.3%. Even real estate stands out, with Welltower at 19.2%.
These aren’t typical slow-growth value plays, but companies pairing cheaper valuations with strong earnings growth.
Small caps are also participating. The Russell 2000 Value Index is up 23% year to date, outpacing the small-cap growth index's 15% gain.
Jefferies data show hedge funds leaning heavily into small caps, with Russell 2000 stocks making up 13% of their net portfolios.
How to think about exposure now
BofA recommends favoring large-cap value stocks, particularly cyclical manufacturing sectors that generate cash flow. The bank specifically flags financials, energy, and materials as the sectors with the strongest buyback capacity.
Healthcare is drawing attention too. Its share of the S&P 500 has fallen to about 9% from a peak near 16%, leaving the sector increasingly overlooked.
JPMorgan expects healthcare earnings growth to strengthen significantly in 2027, potentially marking a more lasting turnaround for the sector.
AI fatigue is also creating new entry points. Investors are looking for diversification away from pure AI plays, and some technology names now trading at lower multiples are showing up on value screens.
Some former high-flying growth stocks have fallen enough to land in value territory, widening the pool beyond traditional old-economy names. And the rotation may still have room to run, with fund managers remaining lightly positioned across many value sectors.