Four factors that could spur a rotation into value stocks

Value-focused investors led by Bernard Horn, president and portfolio manager at Boston-based Polaris Capital Management, identify four factors they say could prompt a sustained shift from growth to value stocks after a prolonged period of growth dominance.

The first factor is higher-for-longer interest rates. Horn notes that benchmark rates remained at or near zero for about 13 years after the global financial crisis and through the pandemic. With borrowing costs now higher, governments are devoting a larger share of revenue to interest payments. Higher rates reduce the present value of distant cash flows and can make companies with current earnings and dividends relatively more attractive.

The second factor is changing inflation and deflation pressures. Global supply chains and low-cost manufacturing had exerted downward pressure on prices for decades, a trend that began to reverse during the COVID period. Tariffs and reshoring have added costs across supply chains, while advances in artificial intelligence could introduce new sources of technology-driven deflation over time. Horn says those opposing forces increase uncertainty about long-term pricing and cash flows, which can lead investors to prefer firms with near-term cash generation.

The third factor is renewed capital discipline. During the era of very low rates, many companies financed growth with less emphasis on immediate profitability. As easy money recedes, investors are placing greater emphasis on balance sheets and free cash flow. Horn summarized the changing preference this way: “higher dividend yields, strong balance sheets and cash generation today rather than promises of tomorrow.”

The fourth factor involves international markets. After a strong U.S. run following the 2024 presidential election, international equities outperformed in 2025. The MSCI World ex-USA Index gained about 29.2% in 2025 while the S&P 500 rose roughly 16.39%, and the Russell 1000 Value Index outpaced the Russell 1000 Growth Index by about 14% between November 2025 and February 2026. International markets generally have larger exposures to cyclical industries and fewer high-multiple technology firms.

Investors and analysts also note high concentration in U.S. large-cap indexes. By the end of 2025, the group of large tech firms often referenced as the Magnificent Seven accounted for about 35% of the S&P 500. Historical research shows extended swings in style leadership can follow periods of extreme concentration. Long-run return data from Dimensional indicate U.S. value stocks outperformed growth stocks by an average of about 4.4 percentage points per year from 1927 through 2022.

Horn and other value-focused investors acknowledge that value underperformance can persist for long stretches. They expect that higher rates, shifting price pressures, tighter capital allocation and wider opportunities outside the U.S. will shape investor decisions about companies with current cash flow and disciplined capital allocation.