Value stocks gain 20% as growth gap hits widest since 2022

Value stocks rose about 20 percent this year as the Magnificent 7 fell 3 percent, the widest performance gap since the 2022 bear market.

"It's finally happened," said Jamie Battmer, co-chief investment officer at Creative Planning, which manages about $370 billion in assets. "For the past roughly 15 years, growth stocks and U.S. tech stocks have been consistently outperforming."

The rotation spans asset classes. Small-cap stocks gained 19 percent, emerging markets 15 percent, and international equities 13 percent, while U.S. large-caps rose 9 percent. The semiconductor sector, which surged 237 percent over 14 months through June, fell 20 percent in July as leveraged bets unwound. A DRAM ETF holding just three stocks dropped 30 percent, and hedge fund Situational Awareness plunged 67 percent before being forced to sell positions to Citadel.

The divergence carries implications for portfolio positioning. The 30-year Treasury yield hit 5.2 percent, a 19-year high, as core PCE stayed above 2 percent for 64 consecutive months. Markets now price a 25-basis-point rate hike in September, and U.S. IPO fundraising has already reached about $144 billion in 2026, surpassing the 2021 peak.

Semiconductors and the Leverage Trap

The semiconductor selloff in July exposed the risks of momentum chasing. South Korean retail investors using leverage on SK Hynix and Samsung faced margin calls, while U.S. hedge fund Situational Awareness — which grew from hundreds of millions to $45 billion on leveraged semiconductor bets — dropped 67 percent in a single month and was forced to sell most of its positions to Citadel.

"All data overwhelmingly proves that humans cannot beat public markets," Battmer said. "Don't try to beat them; the optimal strategy is to own them."

The IPO market tells a similar story. SpaceX's market capitalization briefly exceeded $3 trillion after its listing — higher than Google and Amazon — with a price-to-sales ratio above 150 times. The stock has since fallen more than 50 percent from its peak and now trades below its offering price. U.S. IPO fundraising has already reached about $144 billion in 2026, surpassing the 2021 peak, with OpenAI and Anthropic listings potentially adding further supply.

Bond Market Divergence and AI Capex

The bond market is sending a warning. The 30-year Treasury yield rose to 5.2 percent, the highest since July 2007 and the first time long-term rates have risen during a Fed rate-cutting cycle. Core PCE has remained above 2 percent for 64 consecutive months, and U.S. inflation has averaged about 4 percent annually over the past six years — twice the Fed's target.

"The Fed says inflation is under control, but the bond market strongly disagrees," said Charlie Bilello, chief market strategist at Creative Planning.

Meanwhile, AI capital expenditure shows no signs of slowing. The four major cloud providers — Amazon, Google, Microsoft, and Meta — spent a combined $165 billion in the first quarter, up 87 percent year-over-year and 393 percent higher than three years ago. Google posted negative free cash flow for the first time in its history, while Meta's free cash flow fell 91 percent year-over-year to $784 million.

"These companies were originally light-asset businesses — that was one reason for their valuation premiums — but now they're rapidly transforming into capital-intensive operations," Bilello said.

Nvidia has announced $250 billion in financing for OpenAI's data centers, a circular structure Bilello called "dangerous" and likely to be seen in hindsight as a warning sign.

On the positive side, initial jobless claims have fallen to their lowest level since January 2024, and new business formation in the information technology sector has reached a record high, with the barrier to entry for sole proprietorships significantly lowered.

"People with ideas, people who want to make a change, can now truly go all in and chase the American Dream," Battmer said.

This article is for informational purposes only and does not constitute investment advice.