The start of a new year is usually a good time to revisit your portfolio, your investment plans, and what to expect in the months ahead. It's around this time that a lot of people try to pick their big winners for the upcoming year.
2025 marked another year when large-cap tech really drove S&P 500 and Nasdaq 100 returns. Tech was the best-performing S&P 500 sector in both 2025 and 2023 and was the second best performer in 2024. History suggests that outperformance like that from a single sector doesn't last forever. But what's ready to take its place?
Valuations are stretched and concentration is high
While many investors have undoubtedly enjoyed the bull market in tech and the Magnificent Seven stocks, there's little question that stock prices are getting expensive. The price/earnings ratio of the S&P 500 is 31, a level reached only a few other times in history. That doesn't mean a market crash is imminent, but it could mean that there are better opportunities elsewhere in the market.
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The 2026 path to outperformance for value stocks
The likeliest outcome for the U.S. economy in 2026 might be positive but slower growth compared to what we've seen recently. The annualized GDP growth rate in Q3 2025 came in at 4.3%, the highest reading since Q3 2023. That's also far above the average 2.5% rate of the past 30 years.
For value stocks to perform better than growth stocks, we don't need a bear market or a recession. We just need a growth slowdown. Economic growth rates are above trend right now, but with the manufacturing sector struggling and job growth stagnating, there are signs warning that the early stages of a slowdown might already be in progress.
If that trend continues, I think the Vanguard Value ETF (VTV 0.87%) could be an outperformer in 2026.
NYSEMKT: VTV
Key Data Points
Why the Vanguard Value ETF could be a winner in 2026
Here are a few reasons why I think this ETF is setting up to be a leader in the new year.
Valuation and concentration
As mentioned earlier, the lack of breadth in the current market is concerning. Currently, the top 10 positions in the S&P 500 account for roughly 40% of the index. The tech sector accounts for nearly 35%. Both of those numbers are near all-time highs.
These stocks are already priced for perfection. Much of last year's gains were driven by artificial intelligence (AI) optimism and the huge revenue potential that could come as the infrastructure gets developed. That buzz is slowly starting to wear off and shareholders are starting to look for results from all of that spending. If investors' sky high expectations aren't met, the rotation out of tech stocks could be swift.
Rate cuts and a (potentially) steepening yield curve
Falling interest rates are generally beneficial to all companies, but especially to the economically sensitive ones, including Financials and Industrials. What are the two biggest sector holdings for the Vanguard Value ETF? Financials (22.8%) and Industrials (16.2%).
The Fed is likely to cut rates at least once or twice in 2026. That lower yields on the short end of the curve, but what happens on the long end of the yield curve is still in some doubt. Those yields tend to be more dependent on what happens with the economy. Right now, growth is solid and inflation is still stuck above the Fed's 2% target.
Those two factors suggest that long-term yields could stay higher for longer. That would be especially helpful to banks, whose margins are likely to improve in such a scenario. This overall environment could make value-oriented stocks look more attractive.
Slow growth benefits value
When the economy is humming, growth tends to lead as investors are often willing to expand valuations. As growth slows, those valuations usually start shrinking again. If current above-average growth rates even just revert back to normal, it could be enough to take some wind out of the sails of expensive growth stocks. Just based on how much investors are willing to pay for stocks, value could outperform.
Tech stocks have dominated the financial markets for the past three years. But 2026 is starting to look like the year where returns start to broaden out. Fast growth rates and high valuations are unsustainable over the long term. That doesn't mean stocks have to necessarily correct here, but it could create opportunities for previous unloved and underperforming areas of the market.
The Vanguard Value ETF may be one of the biggest beneficiaries of that shift.
