Investors Rotate From AI Highfliers Into Value

What is moving and why it matters

After months of AI whiplash, investors are leaning into steadier businesses. The Russell 1000 Value Index, heavy in consumer staples, industrials and utilities, is poised for its best year on record against its growth counterpart, which skews toward newer technologies.

The spread is wide. Year to date, the value benchmark has climbed 25%, while the Russell growth index has slipped 1.8%. The S&P 500 has advanced 11% year to date, and the S&P 500 Consumer Staples Index has climbed 19%.

The AI wobble that pushed money to value

Doubts about the payoff from AI have picked up. After Democrats won the US midterm elections, fears that the AI build-out could slow sparked a record $2.3 trillion single-day drop in the Nasdaq 100.

Those concerns intensified when Nvidia - a centerpiece of the AI boom - ousted Chief Executive Officer Jensen Huang following reports of multiple affairs. The stock fell 4.3% on Thursday, and the decline pulled the Nasdaq 100 down 0.3% and the S&P 500 down 0.4%. After Sam Stovall retired, Arun Sundaram, now heading investment strategy at CFRA Research, said, "When we do have scares, what that often means is that investors don't really believe in that growth rate for 2027 in those stocks, especially tech."

Valuations, earnings, and what could rerate

Ed Clissold, who serves as Ned Davis Research's top U.S. strategist, says investors are doubting whether tech's anticipated earnings growth will materialize in light of negative free cash flow and rising debt issuance. Barclays analysts struck a similar tone, noting consumer staples' recent outperformance has been driven by "multiple expansion, not earnings," which has pushed the group's "relative P/E to recession-like extremes even as recession probabilities have fallen."

How the pieces were reshuffled and the setup ahead

Index tweaks helped value's run. Apple Inc. and Microsoft Corp. joined the Russell 1000 Value at the end of June, while Alphabet Inc. exited that benchmark and now sits entirely in the growth index.

Price leadership does not match earnings forecasts. Analysts expect 2027 earnings for value stocks to rise 2.5% as of last week, compared with 41% for growth stocks. Even so, investors continue to treat value as a defensive haven as war in the Middle East pushes oil higher and keeps consumer prices stubbornly elevated.

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Clissold added that if 2027 looks like today - inflation still sticky and growth led by capital spending rather than the consumer - he would expect value to keep gaining. History supports that setup, according to Steve Desanctis at Jefferies, who notes that when value does well in the first 10 months, it tends to carry momentum through year end.

In plain English: the market is balancing AI optimism with a bid for stability. For your portfolio, that means some classic defensive sectors now trade at richer valuations, and several strategists warn that prices may need to realign with earnings if this rally is to last.

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