US equities: Market whiplash could spark a new value regime

Key takeaways

• Since the pandemic, the volatility of returns between growth and value has surged, which we believe is emblematic of a shift toward a new, value-led market regime.
• Volatility spikes are essential in helping decouple stock price from intrinsic value, which creates opportunities for active managers.
• With valuation spreads at historic and unsustainable highs, we believe value stocks have incredibly latent energy that could further amplify returns during an eventual rebound.

In the years since the COVID-19 pandemic, equity markets have undergone a series of sharp and sudden reversals between growth and value stock leadership—moves that have left even seasoned investors scrambling to adapt. These swings have not only been swift, but historically outsized, raising a crucial question: Are these merely cyclical rotations, or do they signal something deeper? The evidence increasingly points to a regime change toward a value-led market.

Increasing volatility creates opportunities

In the decade leading up to the pandemic, growth stocks, particularly in the technology sector, dominated market returns. Ultra-low interest rates, low inflation, and a scarcity of real economic growth funneled capital into companies promising outsized future earnings. The FAANG cohort¹ became emblematic of this era: long-duration assets whose valuations ballooned as discount rates plunged. That trend culminated in 2020 and early 2021, when pandemic conditions accelerated adoption of digital technologies, driving valuations for growth stocks to extreme levels.

However, since the pandemic, the market has seemingly been engaged in a high stakes tug-of-war, with the volatility of returns between growth and value stocks having surged 2.7x times higher than the previous decade (Exhibit 1). We believe that the magnitude of these reversals—sharp, frequent, and wide—suggests more than a tactical trade, but rather a shift toward a new, value-led market regime, as the transition between market regimes is rarely smooth and periods of high volatility have often been followed by a significant rebound in value stocks.

Many investors, particularly those utilizing significant leverage, see this kind of “faster volatility” as something to be avoided at all costs, which leads them to tend to overreact to downside volatility when it surfaces—selling off assets and accumulating cash. However, we recognize that these kinds of volatility spikes are an essential catalyst in helping decouple stock price from intrinsic business value, allowing active managers like ourselves the opportunity to capitalize on mispricings to upgrade portfolios at even lower cost. Such was the case during April’s “Liberation Day” selloff, where even companies reporting good news were dragged down alongside the broader market. Similar episodes of indiscriminate selling have occurred regularly in the post-pandemic era, providing attractive backdrops to take advantage of temporary mispricings of fundamentally sound businesses.

However, the caveat is that investors must be mindful of managing their downside volatility, particularly given the speed and magnitude of the post-COVID market. Our solution is to construct a portfolio of stocks with low correlations to each other, which allows us to manage the downside volatility of the overall portfolio while still using market volatility as a sharp-edged tool to buy those attractive opportunities when they fall more than 30% below our estimated value.

Value has energetic potential

Despite several powerful periods of outperformance by value stocks, the last two years have largely been driven by growth stocks, particularly levered to the development and buildout of artificial intelligence. As a result, valuations spreads have rebounded to historic highs, with value stocks now trading at the 91st percentile relative to growth stocks. We believe that such excesses are not sustainable, and that such depressed valuations represent an incredible store of latent energy to power returns once value stocks begin their eventual rebound. This is not mere speculation. Since 1979, following periods of 25% underperformance versus growth stocks, value stocks have historically recovered and outperformed growth over the following 24 months—a threshold we saw triggered in the first quarter of 2025 (Exhibit 2).

Style reversals are nothing new, but the recent magnitude and frequency of swings between growth and value indicates the debate within markets is intensifying to the point where a new value cycle should crystalize. We believe current valuation extremes in the market suggest such a cycle will take hold sooner rather than later.