No Longer a Sign of Collapse! Value Stocks Outperform Growth Stocks — Experts: AI Expansion Fuels Bull Market

Historically, whenever value stocks have outperformed, it often signaled that the broader market was heading into a downturn. But this time is different: as the bull market approaches its fourth year and major indices continue to hover near record highs, the Russell 1000 Value Index (RLV) has decisively outperformed the Russell 1000 Growth Index (RLG).

According to data compiled by Nationwide, over the past year, the Russell 1000 Value Index rose 31.6%, while the growth index gained only 13.5%. The performance gap between the two, measured over the past 12 months, widened to its largest since the 2022 bear market, reaching approximately 22% as of last week.

However, today’s leading value stocks are vastly different from traditional representatives like Coca-Cola (KO-US) and Comcast (CMCSA-US). One reason for the strong performance of the Russell Value Index this year is the inclusion of many tech stocks—companies historically categorized as growth stocks.

Amazon (AMZN-US) is now the largest holding in the Russell Value Index, followed by Apple (AAPL-US) and Microsoft (MSFT-US), both of which are also key components of the Russell Growth Index.

Early-year strength in value stocks was partly due to the inclusion of popular chip stocks like Micron Technology (MU-US) in the index. However, Micron, which soared earlier, was removed during the latest index rebalancing in June—just as the semiconductor rally peaked—allowing value investors to avoid the subsequent pullback.

This doesn’t negate the fact that value stocks typically gain relative strength when growth stocks struggle. The last time the Russell Value Index delivered such strong excess returns before 2022 was just before the dot-com bubble reached its peak.

The continued rise of value stocks in August suggests that the market rally is broadening beyond just AI-related trades. Resilient U.S. economic conditions, coupled with expectations of widespread productivity gains from AI, are benefiting a wider range of sectors.

Mark Hackett, Chief Market Strategist at Nationwide, said: “One sign of improved market breadth is value stocks outperforming growth stocks, as value encompasses a more diverse and widely distributed set of stocks.” He noted that value investing isn’t a single-theme bet but spans financials, other cyclical stocks, defensive equities, and bond alternatives.

Hackett views this trend not as a warning sign but as a positive indicator for the ongoing bull market.

Traditionally, the logic behind value outperformance is intuitive: during market declines, investors tend to exit growth stocks—especially tech companies whose valuations rely heavily on future earnings. These stocks are often the first to suffer when interest rates spike or sentiment sours.

In contrast, value stocks are typically found in defensive sectors like consumer staples, utilities, and healthcare. These firms generally have stable earnings, predictable cash flows, and lower valuations, offering stronger downside protection in weak markets. They also usually offer higher dividend yields, making them attractive to income-seeking investors.

But this time, the context is different. The market is entering its fourth year of a bull run, with AI still the primary engine driving gains. Capital spending related to large-scale AI infrastructure remains at historic highs. While U.S. economic growth has slowed, it continues to expand, and consumer spending shows resilience.

FTSE Russell’s classification of many large tech firms as possessing both value and growth characteristics reflects an evolving definition of the value factor. Analysts point out that value factors now place greater emphasis on earnings quality.

Catherine Yoshimoto, Head of U.S. Index Product Management at FTSE Russell, explained that about 35% of the Russell 1000 Index’s market cap consists purely of growth stocks, another 35% purely of value stocks, and roughly 30% fall into neither category clearly. These companies are assigned to indices based on style probability.

Rather than rigidly categorizing firms, FTSE Russell calculates a “style score” using metrics like price-to-book ratio, estimated two-year forward earnings growth, and five-year revenue growth, then allocates market capitalization proportionally between growth and value indices. This allows large tech companies to appear in both indices simultaneously.

Therefore, the current market isn’t seeing growth stocks collapse while value stocks rise alone. Instead, growth stocks are still delivering double-digit returns, but value stocks are rising even more strongly.

Moreover, as AI investing matures, investor focus is shifting from early AI leaders to second- and third-wave beneficiaries in semiconductors and other AI-related spending. Indrani De, Global Head of Investment Research at FTSE Russell, noted that these companies tend to be smaller, more value-oriented, and attractively valued.

Compared to the ultra-low interest rate environment of the 2010s, current rates are closer to historical norms—another factor supporting sustained investor preference for value stocks.

“We’ve all grown accustomed to a post-financial crisis world where growth stocks consistently led value,” De said. “But remember, that was a world of extremely low interest rates. Now we’re moving toward a normalized rate environment similar to pre-crisis periods, with an upward-sloping yield curve—a clear tailwind for value over growth.”

The Q2 earnings season is nearing its end, and so far, tech earnings have been very strong. However, this sets up high comparison bases for next year—especially for the so-called ‘Magnificent Seven’ mega-cap tech firms. In contrast, value-oriented sectors like healthcare and financials face lower earnings comparisons in Q2 2027, giving them room to maintain relative outperformance.

This leads Hackett to believe that value stocks could remain strong—not just for a few quarters, but for an extended period.