Have you ever watched a marathon where the frontrunners blaze ahead for miles, only to fade in the final stretch while the steady pack catches up? That’s kind of how I’ve been feeling about the stock market lately.
All year long in 2025, the big growth names – especially those tied to artificial intelligence – have carried the torch. But as we head into the holidays, something interesting is happening. The underdogs, those often overlooked value stocks, are picking up speed. And quite a few seasoned investors are betting this momentum could carry well into 2026.
It’s not just wishful thinking. There’s real performance data backing it up, along with shifting economic signals that could make cheaper, more fundamentally sound companies the place to be.
The Shift That’s Already Underway
Let’s start with what’s happening right now. In the closing months of 2025, value-oriented parts of the market have quietly started to outperform their growth counterparts.
Take the major value and growth indexes, for instance. The Russell 1000 Value has edged ahead both this month and this quarter – modest gains, sure, but meaningful when you’ve been trailing all year. Meanwhile, the growth side has lagged just a bit. It’s subtle, but these late-year moves often hint at bigger trends.
I’ve noticed this pattern before. Markets don’t flip overnight. They tend to give warning signs, small rotations that build over time. And right now, the breadth is improving – more stocks participating in the rally rather than just a handful of mega-caps.
Financials hitting all-time highs. Small caps reaching new peaks earlier in December. Even the equal-weighted S&P 500 outperforming the traditional cap-weighted version. These aren’t flashy headlines, but they’re healthy signs for a bull market that wants to keep running.
Why Breadth Matters More Than Ever
In my experience, concentrated rallies can be exciting, but they also feel fragile. When everything hinges on a few names, any disappointment can trigger sharp pullbacks.
A broader advance, though? That’s different. It suggests real economic strength underneath, more companies benefiting from favorable conditions. And that’s exactly what we’re starting to see as non-tech sectors take the lead.
Think about it this way: the market’s biggest AI winners have had an incredible run since late 2022. Valuations stretched. Expectations sky-high. At some point, reality has to catch up. When it does, investors naturally look elsewhere for opportunities that aren’t priced for perfection.
A lot has changed over the last few weeks. And heading into next year, the environment still looks supportive for further rotation toward value.
– Portfolio manager at a value-focused firm
That sentiment echoes what I’m hearing from quite a few pros. The conditions feel ripe for value to finally have its moment.
Economic Tailwinds on the Horizon
Perhaps the most intriguing part is how several macroeconomic factors could align perfectly for value stocks in 2026.
First, interest rates. If central banks continue easing in the first half of the year, that typically benefits more cyclical, rate-sensitive areas – think financials, industrials, consumer discretionary. These sectors tend to dominate value indexes.
Second, productivity. There’s growing talk that AI, despite the hype, might actually deliver meaningful efficiency gains across the broader economy. Not just for the tech giants building the tools, but for everyday companies using them.
- Banks automating back-office processes
- Retailers optimizing supply chains
- Manufacturers improving output with smarter systems
If productivity rises sustainably, economists say the economy could grow faster without reigniting inflation. That “higher speed limit” would be a massive tailwind for traditional fundamental factors – exactly the kind value investors love.
A higher speed limit on growth because of productivity means the economy can run at 2.5% real without inflation problems. That’s a tailwind for value, earnings growth, and procyclical equities.
– Chief market strategist at an independent research firm
Add potential policy changes – tax cuts, deregulation – and you have a recipe for stronger corporate earnings across a wide range of industries that have largely sat out the AI boom.
Where to Look for Opportunities
So if this rotation plays out, which areas might benefit most? Two sectors keep coming up in conversations.
Banks stand out for obvious reasons. Lower rates improve net interest margins eventually, while a growing economy means fewer loan losses. Plus, many trade at reasonable valuations with decent dividends – classic value characteristics.
Consumer discretionary is another interesting spot. Think retailers, restaurants, autos – companies tied to consumer spending. If jobs stay strong and real wages keep rising, these areas could surprise to the upside.
Small caps deserve a mention too. They’re trading at a significant discount to large caps right now – around 27% on a P/E basis, according to some analyses. Historically, that kind of gap has often preceded periods of small-cap outperformance.
But here’s the caveat I always remind myself: cheap doesn’t automatically mean immediate gains.
- Valuations tell you about risk/reward
- They don’t necessarily tell you about timing
- Catalysts still matter
Some small companies are cheap for good reasons – heavy debt, weak competitive positions. The winners will likely be those with solid balance sheets and exposure to the right themes.
The Psychology Behind the Rotation
One aspect that fascinates me is the behavioral side. After years of growth dominance, many investors have become conditioned to chase momentum. Value feels boring by comparison.
Yet markets are cyclical. Styles go in and out of favor. When growth eventually stumbles – whether from valuation mean reversion or disappointing earnings – the pendulum often swings hard the other way.
We’re not there yet. Growth could keep working for a while longer. But the early signs of rotation suggest the shift might already be starting.
And honestly? A healthier, broader market would be welcome after years of narrow leadership. It reduces concentration risk. Creates more opportunities. Feels more sustainable.
What Could Derail the Thesis
To be fair, there are always risks. If inflation reaccelerates and forces tighter policy, rate-sensitive value sectors could suffer. Or if AI delivers even bigger breakthroughs than expected, growth leadership might extend further.
Geopolitical events, recession fears resurfacing – plenty could disrupt the narrative. That’s why I never go all-in on any single theme.
But on balance, the setup for 2026 looks intriguing for those who’ve been patiently waiting for value’s turn.
Positioning for Whatever Comes Next
So how might investors approach this potential shift? Gradually tilting toward value makes sense to me, rather than trying to time a dramatic switch.
- Review current allocations – how heavy are you in mega-cap growth?
- Consider adding exposure through broad value ETFs initially
- Then look for individual names or sector funds in promising areas
- Keep some dry powder for opportunities if volatility picks up
Diversification still matters. Blending growth and value often serves investors well over full cycles.
The most interesting part? We might be at the early stages of a regime change that lasts several years. These rotations don’t happen often, but when they do, they can create significant wealth for patient investors.
As we close out 2025, it’s worth asking yourself: Are you positioned for what’s already starting to unfold, or still chasing yesterday’s winners?
Either way, 2026 could prove to be a fascinating year – one where the market’s character changes in ways many aren’t fully expecting yet.
Whatever happens, staying flexible and keeping an eye on evolving breadth will be key. The market rarely moves in straight lines, but the signals right now certainly point toward a more balanced – and potentially rewarding – landscape ahead.
