After two near-record-setting months, stocks are encountering their first real turbulence since March. It’s no surprise.
While stocks go up an average of 10% a year, they rarely do so in a straight line. And after the S&P 500 rallied nearly 20% in April and May and the Nasdaq shot up nearly 30%, a pullback of some kind – or possibly even a true correction – was to be expected. It appears it might be happening all at once.
Since topping out at record highs on June 2, the major indexes have fallen in four of the last six trading days, with the Nasdaq down more than 6% while the S&P has dipped roughly 4%. During that same stretch, value stocks have … (checks notes) … gained ground. Granted, the gains have been quite modest – less than 1%. But the fact that value titles are gaining ground at all against the backdrop of heavy selling in tech names and other growth stocks speaks to their utility in times of volatility.
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This isn’t a major shift. It’s simply the market returning to its first-quarter form, as value outperformed growth by a wide margin through the first three months of 2026. Then, the artificial intelligence trade came back in favor, and growth stocks took off in April and May. Value stocks performed more than fine – the Vanguard Value Index Fund ETF (VTV) was up a not-too-shabby 11% during those two months. But they couldn’t keep pace with the AI-infused growth stock surge.
Rotation Out of AI – and Into Value?
Now, that may be flipping again. The bull market isn’t over, and given the boffo earnings growth companies are experiencing right now thanks to the AI revolution, it’s not likely to end anytime soon. And yet, AI names – semiconductor and software plays in particular – got a bit out over their skis this spring, and a re-rating of some kind was in order. But investors haven’t stopped buying stocks altogether. Instead, they’re rotating into undervalued names that didn’t get the same kind of generational bump AI stocks received in April and May.
That’s been a boon for my Cabot Value Investor portfolio, as most of our 10 holdings in that value-oriented newsletter are up in June. If you’re a value investor, there’s a lot to like in the current market, even as the major indexes are in the midst of what looks like a microwaved market pullback. Even if you’re not a value investor, there’s no need to panic. Pullbacks are normal and, frankly, healthy, especially after the two-month run-up we just witnessed.
And the pullback isn’t happening in the market’s many undervalued sectors, as the thin nature of the rally over the last two months (the Equal Weight S&P 500 index advanced less than 3% from April 20 to its early-June top) has resulted in seven of the 11 S&P sectors trading at cheaper valuations (on a forward price-to-earnings basis) than the 21.8x forward P/E of the index itself. Thus, investors shouldn’t have much trouble finding bargains in a market that – at least on the surface – appears vastly overcooked.
Bottom line: I would not be surprised if value outperforms growth for much of the summer, the way it did for much of the winter. And if you need help finding the right value stocks, I encourage you to subscribe to my aforementioned Cabot Value Investor advisory.
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