Value Stocks Stage a Comeback as AI Fatigue and War Jitters Hit Growth Darlings

The market’s collective obsession with AI and tech has finally hit a wall, and the old guard, those battered, unloved value stocks, are quietly staging a comeback. It’s almost enough to make you believe in mean reversion again. While the XLK tech sector ETF sits frozen at $138.76, refusing to budge despite a backdrop of escalating war risk and macro anxiety, the narrative is shifting. Federated Hermes CIO Stephen Auth’s recent call for a return to value may sound like a broken record, but this time, the tape is playing to a different crowd: traders who are tired of chasing momentum in a market that’s lost its pulse.

Let’s get real. The S&P 500’s tech-heavy rally has been running on fumes for months. The AI trade, once the only game in town, is now crowded, over-owned, and, dare we say it, boring. The war in Iran, rising rates, and the specter of a labor market wobble have all conspired to sap the market’s risk appetite. Meanwhile, value stocks, those reliable, cash-generating dinosaurs, are quietly outperforming their growth peers for the first time since the pandemic era. The rotation isn’t dramatic yet, but the signs are unmistakable.

Stephen Auth’s argument is straightforward: profit margins in tech are peaking, and AI’s impact on productivity is overstated, at least in the short run. Value names, especially in sectors like industrials, energy (yes, even after the oil premium fizzled), and financials, are trading at discounts that haven’t been this wide since the COVID crash. The data backs it up. According to FactSet, the forward P/E gap between growth and value is at a 10-year extreme, and the dividend yield on value indices is now double that of their growth counterparts. In a market where cash is king and volatility is back on the menu, that’s not nothing.

The price action tells the story. XLK, the tech ETF, is flatlined at $138.76, refusing to participate in either the war premium or the AI euphoria. Meanwhile, value ETFs and select single names are quietly grinding higher on real earnings and, crucially, actual cash flows. The market’s refusal to reward growth at any price is a sea change from the “buy the dip” mentality that defined the last cycle. Traders are waking up to the reality that not every company with a chatbot deserves a 40x multiple.

The macro context is doing value a lot of favors. The Fed is still hawkish, inflation is sticky, and the labor market is sending mixed signals. If rates stay higher for longer, growth stocks, especially the unprofitable kind, are going to have a rough time justifying their valuations. Value, on the other hand, is built for this environment. These companies don’t need zero rates to survive. They generate cash, pay dividends, and, importantly, aren’t priced for perfection. With geopolitical risk at a multi-year high, the market’s appetite for “boring” is suddenly insatiable.

Historically, these rotations don’t happen overnight. The last time value outperformed growth in a meaningful way was during the post-dotcom bust and, more recently, in the early days of the COVID recovery. Both times, it took a catalyst, either a tech crash or a macro shock, to force the rotation. This time, it’s a combination of war risk, AI fatigue, and a market that’s finally rediscovering the virtues of cash flow and balance sheet strength.

The technicals are lining up, too. Value indices are breaking out of multi-year bases, while growth is rolling over. The relative strength ratio of value to growth has flipped positive for the first time in years. If this trend continues, expect a lot of pain for the crowded “long tech, short value” trade that has dominated hedge fund positioning for most of the decade.

Strykr Watch

Key levels to watch are the $138.76 mark on XLK, if tech can’t break out above this, expect more rotation into value. On the value side, look for breakouts in industrials and financials, especially those with strong dividend coverage and low leverage. The 200-day moving average on value ETFs is sloping up, while tech’s is flatlining. RSI on value indices is pushing into overbought territory, but that’s not a sell signal in a rotation. Watch for volume spikes in value names as institutions rebalance. If we see a sustained move above recent highs in value ETFs, the rotation could accelerate.

The risks are clear. If the Fed pivots dovish or the war premium suddenly evaporates, growth could stage a violent squeeze and leave value buyers holding the bag. But the bigger risk is that traders are underestimating just how crowded the tech trade has become. If everyone is on the same side of the boat, even a small wave can capsize the trade. Keep an eye on positioning data and fund flows, if the exodus from growth accelerates, the pain could be sharp and swift.

The opportunity is for traders willing to go against the grain. Long value, short growth is the obvious trade, but the real alpha may be in picking single names with fortress balance sheets and real pricing power. Look for companies with low debt, high free cash flow, and management teams that know how to navigate a choppy macro. For the brave, selling covered calls on tech names could be a way to generate yield while waiting for the next shoe to drop.

Strykr Take

The market’s love affair with tech isn’t over, but the honeymoon is. Value is back, and this time, it’s not just a dead cat bounce. For traders, the message is clear: don’t fight the rotation. There’s real money to be made betting on the old guard while the new kids on the block figure out how to justify their multiples in a world that suddenly cares about cash flow again.