The Great Normalization and the Resurgence of Value in 2025

The U.S. Treasury yield curve's steepening in 2025 marked a pivotal turning point in global capital markets, reshaping the long-standing rivalry between growth and value equities. As the 10-year Treasury yield climbed to 4.16% in late 2025-well above the 2-year yield of 3.48%-investors began to recalibrate their portfolios in response to a shifting macroeconomic landscape according to market analysis. This bull steepening, driven by renewed confidence in economic resilience and a "no landing" scenario, signaled the end of an era dominated by growth stocks and the return of traditional value investing principles.

The Mechanics of the Shift

The steepening yield curve acted as a gravitational force, pulling capital toward sectors and assets that thrive in a higher interest rate environment. Value stocks, particularly in financials and industrials, surged as rising rates amplified the appeal of tangible cash flows and asset-heavy businesses. JPMorgan Chase and Caterpillar, for instance, saw significant gains as investors flocked to companies with strong balance sheets and earnings visibility. Conversely, growth stocks-especially those in the technology sector-faced headwinds. As data shows, high valuations, built on long-duration earnings projections, became harder to justify in a world where borrowing costs and discount rates were no longer near historic lows.

This reallocation was not confined to the U.S. The MSCI EAFE Value Index, which overweights financials and utilities while underweighting technology, outperformed its growth counterparts in international markets. This pattern mirrored the early 2000s, when rising rates similarly favored value-oriented equities. As central banks signaled a "higher for longer" rate environment, the trend was further entrenched, with investors prioritizing short- and intermediate-duration bonds over long-end Treasuries.

Sectoral Realignments and the AI Paradox

The steepening curve also exposed divergent sectoral vulnerabilities. Defensive value sectors like healthcare and utilities held up well, while growth-dependent industries such as chemicals and metals and mining lagged. Meanwhile, the AI-driven technology sector presented a paradox: despite concerns about overvaluation, capital inflows into AI infrastructure-data centers, semiconductors, and cloud computing-reached unprecedented levels. According to projections, by 2025, AI-related capital expenditures were projected to exceed $500 billion annually, with data center debt approaching $1 trillion by 2028. This surge, while fueled by innovation, raised alarms about a potential bubble reminiscent of the dot-com era, particularly as the top five tech firms now accounted for 30% of the S&P 500's market cap.

The Federal Reserve's policy trajectory further complicated the landscape. While rate cuts in late 2025 initially buoyed equities, political pressures on the central bank-exemplified by the controversial appointment of Stephen Miran as a temporary governor-cast doubt on its independence. Investors priced in a Federal Funds rate near 3% by mid-2026, but uncertainty lingered about whether this would materialize without a significant economic slowdown.

Implications for Investors

The normalization of the yield curve has forced a reevaluation of portfolio construction. Value stocks, once dismissed as relics of a bygone era, have regained relevance as proxies for economic stability. The Russell 1000 Value Index's 2.7% gain in November 2025, compared to a 1.8% decline for the Russell 1000 Growth Index, underscored this shift. For investors, the lesson is clear: in a world of higher rates, companies with predictable cash flows and low sensitivity to interest rates-such as tobacco and pharmaceuticals-offer a more compelling risk-reward profile.

However, the resurgence of value does not signal the end of growth investing. Instead, it demands a more discerning approach. AI and other high-growth sectors remain critical to long-term innovation, but their valuations must be tempered by rigorous scrutiny of fundamentals. As one analyst noted, "The key is to balance the optimism of technological progress with the caution of a more normalized rate environment."

Conclusion

The steepening yield curve of 2025 has not merely altered asset prices-it has recalibrated the very logic of capital allocation. Value stocks have reclaimed their place in the investment universe, while growth equities must now prove their worth in a world where cheap money is no longer a given. For investors, the challenge lies in navigating this new normal: leveraging the strengths of value while selectively engaging with growth opportunities that can withstand the rigors of a higher-rate reality.