Value Stocks Outperform Benchmarks by 1.7% in Q2

In the recent period of market volatility in the U.S. stock market, value investing has emerged as a prominent strategy. While the broader market experienced a significant rebound, value stocks, which had been largely overlooked, began to outperform. According to data compiled by Jefferies, approximately 63% of actively managed funds focusing on large-cap value stocks outperformed their benchmarks in the second quarter, marking the best performance since the depths of the 2020 pandemic.

As market attention was drawn to the tech giants leading the April rebound, astute fund managers identified lucrative opportunities in undervalued sectors. Jefferies noted that value funds heavily invested in the industrial sector, which saw an 11% gain matching the S&P 500 index, while avoiding utilities, consumer goods, and real estate—sectors that underperformed in the Russell 1000 Value Index.

The industrial sector's strong performance signals a positive outlook for value stocks. With a stable economic environment and the prospect of interest rate cuts, some market observers anticipate broader recovery in this sector. Steven DeSanctis, a stock strategist at Jefferies, commented, "We believe the economy will avoid a recession, and value stocks should perform better. Additionally, we expect three interest rate cuts in the second half of 2025, which will benefit cyclical and value stocks."

Despite value stocks lagging behind growth stocks in absolute terms, value investors' relative outperformance stands in stark contrast to the lackluster performance of growth funds. Jefferies data shows that large-cap value funds outperformed their benchmarks by 1.7 percentage points in the last quarter, while growth funds lagged by 0.3 percentage points.

The "cigar butt" investment philosophy, championed by Warren Buffett, has regained traction amidst the high-growth, high-risk tech and AI boom. Over the past week, the value factor led all 12 style factors tracked by Bloomberg.

The S&P 500 Industrial Index, which includes manufacturing and transportation companies, has neared its historical peak, driven by expectations of economic recovery and easing trade tensions. This sector has been the best performer over the past six months, bolstered by positive economic data and the truce in U.S.-China trade relations.

The financial sector has also been a key driver of the value stock rebound, ranking as the third-best performing sector in the S&P 500 since the start of the year. Following the successful stress tests of 22 major U.S. banks by the Federal Reserve, the sector has regained momentum, validating the banking industry's resilience and sparking a wave of stock buybacks and dividends.