Value Strikes Back: Inside 2026’s Great Rotation

The mantra carrying the markets higher for years has been to leave it to mega-cap tech titans and AI leaders to drive the bulk of market gains, leaving cap-weighted indexes historically top-heavy. But a new narrative has begun to take over.Key Takeaways Driven by market rotation, the Russell 1000 Value Index returned 32% over the past year versus Growth’s 14%. The S&P 500 forward P/E compressed from 22x to 19x as skepticism surrounding AI capex spending grew. Value and dividend ETFs saw huge flows, including Schwab’s SCHD ($16.5B inflows) and Avantis’ AVLV ($7 billion). Thanks to a broadening rotation — fueled by a decisive AI pivot, a sharp valuation reset, and index reconstruction — Value is finally stealing the show. The Russell 1000 Value Index has returned roughly 32% over the past year, compared to just 14% for Russell 1000 Growth. With rates still elevated, mega-cap tech stocks entered the year priced to perfection. But as skepticism grew over AI capex spending, the bar became harder to clear. The S&P 500’s forward P/E multiple compressed from roughly 22 times earnings to 19 times earnings. High-duration tech names took the hardest hit, coming down from even higher multiples.AI Boom: Driving Value’s ComebackAI spending has moved beyond software algorithms into massive physical infrastructure requirements. That capex boom is flowing directly into industrials, utilities, energy, and materials — sectors that have typically carried heavy weightings in value benchmarks but run structurally light amid growth indexes. As a result, value and dividend-focused ETFs are pulling in billions, reversing a multi-year trend of growth dominance.The Index Construction Effect: Value Isn't What It Used to BeAdvisors looking under the hood will find that index construction has fundamentally evolved, blurring the lines between growth and value. For instance, June’s annual Russell reconstitution dramatically redefined benchmark exposures. A few notable changes: Amazon (AMZN) is now the single largest Russell 1000 Value holding. Microsoft (MSFT) and Apple (AAPL) sit as major constituents in both Growth and Value. High-flying chip makers like AMD and Micron (MU) were rebalanced out of Value after already fueling its run.Data from State Street (as of July 27) highlights an even starker divergence: Technology stocks classified as Value have outperformed Growth-classified tech stocks by nearly 70% this year.Where the Value Money is FlowingMoney managers are deploying capital across five distinct ETF buckets: Active Large-Cap Leaders: Advisors seeking disciplined, high-conviction security selection are increasingly looking beyond cap-weighted benchmarks. The Capital Group Dividend Value ETF (CGDV A) and the Avantis U.S. Large Cap Value ETF (AVLV B+) have dominated active category flows, each drawing roughly $7 billion in net YTD inflows. Both funds highlight a growing advisor appetite for active stock-picking in an environment where single-stock dispersion is widening. Core Passive Large-Cap Value: Traditional index-based funds remain the foundational anchor for portfolios de-risking from mega-cap tech concentration. The Vanguard Value ETF (VTV A) has gathered $6 billion in net new assets year to date. With its ultra-low fee structure and structural overweights to cash-generative sectors like financials, healthcare, and industrials, VTV serves as a core rebalancing tool. High-Quality Income: Yield-focused strategies continue to attract steady defensive allocations amid shifting rate expectations. The Schwab U.S. Dividend Equity ETF (SCHD B+) remains a staple for income-oriented accounts, combining strict valuation discipline with high-quality dividend growth to cushion portfolios against real-yield volatility. The $106 billion fund has consistently led the charts among dividend-focused ETFs, hitting the number one spot on multiple periodic flow leaderboards with over $16.5 billion in net creations and is up 26% on a NAV basis. Value Beyond the Border: As concentration concerns linger in domestic indexes, advisors are looking abroad for deeper valuation discounts. The Dimensional International Value ETF (DFIV A+) has captured $3 billion in net inflows, giving investors targeted exposure to low-P/E developed market equities across Europe and Asia. Free-Cash-Flow Quality: Beyond traditional price-to-book or price-to-earnings metrics, profitability-screened strategies are capturing significant market share. The VictoryShares Free Cash Flow ETF (VFLO B+) highlights how “quality cash generation” acts as a powerful factor filter. VFLO has scaled to $9 billion in AUM on the back of a 32% year-to-date return, proving that rules-based cash-flow screening is driving real capital alongside traditional value metrics. Rotation, Not RevolutionThis factor shift isn’t a signal that tech is failing or growth is dead — corporate earnings across technology and AI remain exceptional. Rather, this cycle reads more like a healthy mean-reversion trade within a secular growth bull market rather than a permanent regime change. Instead of abandoning secular growth entirely, advisors may want to consider a barbell strategy. Pairing core secular tech holdings with cash-generative, dividend-paying or free-cash-flow value ETFs allows client portfolios to maintain upside participation while cushioning against single-sector valuation compression. For more news, information, and strategy, visit ETFdb. VettaFi LLC (“VettaFi”) is the index provider for VFLO, for which it receives an index licensing fee. However, VFLO is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of VFLO.