The Great Rotation: Why Value Stocks Are Poised to Outperform in 2026

The stock market is undergoing a profound structural shift. For much of 2025, growth stocks-particularly those in the technology sector-dominated investor attention, driving the Nasdaq Composite to record highs. Yet, as we enter 2026, the winds of change are evident. The Dow Jones Industrial Average, a barometer of value-oriented, economically sensitive industries, has notched seven consecutive months of gains, closing November 2025 up 0.3% and achieving a year-to-date (YTD) return of 13.88%. In contrast, the Nasdaq Composite, long the poster child for speculative growth, fell 1.45% in November-the first monthly decline since March 2025-despite a YTD gain of 21.71%. This divergence marks the beginning of what may prove to be a defining trend: a strategic rotation from high-growth, low-earnings tech darlings to undervalued, earnings-driven sectors like financials and healthcare.

The Fed's Pivotal Role in the Rotation

Central to this shift is the Federal Reserve's evolving monetary policy. After three rate cuts in 2025, including a 25-basis-point reduction in December that brought the policy rate to 3.50%-3.75%, the Fed has signaled a more cautious path for 2026. The updated Summary of Economic Projections (SEP) anticipates only one rate cut next year, with the median forecast placing the terminal rate at 3.25%-3.50% by year-end. This tightening pause, coupled with the Fed's increasingly hawkish tone-evident in dissenting votes within the FOMC-has recalibrated investor expectations. Growth stocks, which thrived in a low-rate environment, now face higher discount rates, while value stocks, often tied to sectors benefiting from higher interest margins, have gained traction.

The resolution of the U.S. government shutdown in late 2025 further bolstered this trend. As fiscal uncertainty abated, markets responded with optimism. S&P 500 and Nasdaq 100 futures surged on news of progress toward reopening the government, with investors anticipating a rebound in Q1 2026 GDP after the shutdown's drag on Q4. This stabilization reduced the premium for defensive, high-growth assets and restored confidence in cyclical sectors.

Earnings Momentum in Financials and Healthcare

The financial sector has emerged as a standout beneficiary of this rotation. In Q3 2025, all 10 major financial institutions exceeded earnings estimates, driven by robust net interest margins and a favorable rate environment. JPMorgan Chase, Bank of America, and American Express reported results that underscored the sector's resilience. Meanwhile, healthcare, though more mixed, displayed pockets of strength. UnitedHealth Group and Elevance Health delivered double-digit revenue growth, while HCA Healthcare maintained strong margins. These results, combined with the sector's defensive characteristics, have prompted Schwab's Center for Financial Research to upgrade healthcare to an "Outperform" rating.

Yet, the most compelling case for value stocks lies in their valuation. The Morningstar US Value Index rose 2.7% in November 2025, outperforming the -1.8% decline in the US Growth Index. This trend reflects a broader reallocation of capital toward sectors trading at lower price-to-earnings (P/E) and price-to-book (P/B) ratios. Financials and healthcare, with their historically lower valuations compared to growth-heavy tech, are now attracting investors seeking more sustainable returns. According to financial analysts, this shift is driven by a fundamental realignment of capital flows.

A Strategic Pivot for Investors

The rotation is not merely a short-term correction but a structural realignment. Growth stocks, which had captured 80% of the S&P 500's returns in 2024, now face headwinds from higher rates and stretched valuations. Conversely, value stocks-particularly those in financials and healthcare-are benefiting from strong earnings, improving economic fundamentals, and a Fed policy shift that favors sectors with tangible cash flows.

For investors, the implications are clear. The coming year demands a rebalancing of portfolios toward undervalued, resilient industries. Financials, with their exposure to rising interest rates, and healthcare, with its inelastic demand, offer compelling long-term prospects. As the market moves beyond the speculative fervor of the past, these sectors are poised to deliver the kind of steady, earnings-driven growth that defines a mature, diversified portfolio.

Conclusion

The "Great Rotation" is not a fleeting market fad but a response to shifting macroeconomic realities. With the Fed's tightening cycle in retreat, the resolution of fiscal uncertainty, and a surge in earnings from traditional sectors, value stocks are reclaiming their place as the bedrock of prudent investing. For those who recognize this shift early, the rewards could be substantial.