The U.S. stock market has been a real roller coaster ride in 2026.
In the first quarter of the year, investors rotated out of tech and growth stocks and into value, defensive, dividend, and small-cap stocks. The idea of fewer, if any, rate cuts ahead and the start of the war in Iran resulted in the markets turning more risk-averse.
In April and May, following a strong quarterly earnings season, growth took back leadership. Tech revenue and earnings came in stronger than expected, fueling the return of the artificial intelligence (AI) beneficiaries.
In June, momentum has swung back in value's favor in a big way. The Fed's hawkish turn and 4% inflation had investors rethinking allocations again.
Image source: Getty Images.
Value is significantly outperforming in 2026
Using the Vanguard Growth ETF (VUG +1.04%) and the Vanguard Value ETF (VTV +0.24%) as proxies, value is beating growth year to date (as of 6/26) by 14.4% to 1.8%.
The primary themes that the market is focused on right now are:
- The Fed
- Inflation
- The Iran war
The AI boom and its effect on financial results going forward seem to be priced in at this point (although individual cases like Micron Technology's blowout quarterly earnings report could still send prices higher). The unknowns are what the market seems more focused on.
That theme has kept value stocks outperforming, especially in June, when the Vanguard Value ETF is outperforming the Vanguard Growth ETF by 11% so far.
NYSEMKT: VTV
Key Data Points
Will value remain the leader for the rest of 2026?
The outlook for the rest of 2026 still seems to favor value over growth.
The annualized U.S. inflation rate is back above 4% for the first time since May 2023. It could remain in the 3% to 4% range for several more months, but falling oil prices may take some of the pressure off if they can remain lower.
A firm end to the war in Iran would be the best outcome for U.S. stocks. Not only would it likely keep oil prices well below the $100 level, but it would also reduce geopolitical risks, ease inflationary pressures, and potentially give the Fed some room to take rate hikes off the table later this year. All of these factors would support U.S. stock prices.
NYSEMKT: VUG
Key Data Points
However, these remain unknowns with no clear sense of when they might be resolved. Investors already seem inclined to favor value stocks that could provide some downside protection should things go south. Plus, with all of the Magnificent Seven stocks trading at least 12% below their all-time highs, there may be some perception that the previous mega-cap leaders are no longer the winners they once were.
Value has been a big winner so far in 2026. The ride might not be over yet.
