In a quarter dominated by megacap tech and AI-driven rallies, a quieter revolution took place: savvy fund managers who scoured the market for undervalued stocks outperformed their benchmarks by a wide margin. Despite the Russell 1000 Value Index trailing the S&P 500’s blistering ascent, 63% of active value managers beat their benchmarks in Q2, the strongest showing since early 2020.
As sectors like industrials and financials roared back to life, investors betting on beaten-down names found fertile ground. Kevin Rask, a strategist at Maverix-Global, dissects how and why value stocks rebounded so sharply, and what this means for the rest of 2025.
Value vs. Growth: A Tale of Two Strategies
While headlines celebrated soaring tech giants, value stock pickers quietly outperformed by 1.7 percentage points versus their benchmarks, according to Jefferies data. In contrast, growth-focused managers lagged by 0.3 percentage points, underscoring the perils of chasing last quarter’s winners into ever-higher valuations.
This divergence reflects a deeper market dynamic: as economists grew more confident about the strength of the recovery, economically sensitive sectors surged while traditional “bond-proxy” areas remained sluggish. Value investors, unshackled from benchmark constraints, rotated into names with sturdy balance sheets and cyclical upside.
The Industrial Resurgence
The standout story was in industrials, where stocks gained 11% last quarter, matching the S&P 500’s overall performance. Manufacturing companies and transportation firms benefited from fading trade tensions between the U.S. and China and robust domestic activity.
These gains were no anomaly. Over the past six months, the S&P 500 Industrials Index has been trading near its all-time high, driven by optimism about:
- A trade truce reducing tariff uncertainty
- Resilient economic data, despite lingering global risks
- Strong order backlogs that have insulated many firms from supply-chain bottlenecks
For value investors, industrials offered a clear path to outperformance, combining predictable earnings with cyclical leverage.
Financials: The Forgotten Engine
Another pillar of the value rebound was the financial sector, which rose to become the third-best performer in the S&P 500 since January. Banks in particular drew renewed interest after 22 major U.S. institutions passed the Federal Reserve’s annual stress test, confirming their ability to withstand severe recessions.
The impact was dramatic: the KBW Bank Index surged nearly 40% from its April lows, as cleared banks unleashed stock buybacks and hiked dividends. This flood of capital back to shareholders provided an instant boost to value portfolios overweight in financial names.
Why Value Works in a Strong Economy
Many analysts argue that value stocks thrive when economic growth remains solid and interest-rate cuts loom. Unlike bond proxies, utilities, consumer staples, and real estate, these companies benefit directly from rising volumes and higher input costs that can be passed on to customers.
Despite outperforming peers, value stocks still trade at discounts to growth names. As **markets price in three rate cuts in the back half of 2025, cyclicals could enjoy further upside from both lower financing costs and stronger end-market demand.
Recent Momentum and Broader Trends
Value’s recent strength goes beyond quarterly comparisons. In the last week alone, it outpaced each of the 12 style factors tracked by Bloomberg, demonstrating a broad-based shift in sentiment. Investors seeking shelter from tech volatility found comfort in dividends, lower P/E ratios, and tangible asset bases.
Within value, the message was consistent: companies with durable cash flow and clear catalysts, whether a rebound in industrial output or regulatory tailwinds for banks, offered better risk-reward than sky-high growth stocks.
Risks and Considerations
Value investing is not without its pitfalls. Some beaten-down sectors remain under pressure due to secular headwinds, energy companies facing renewable competition, or retailers grappling with e-commerce disruption. Active managers must continually sift through financials, industrials, and other segments to avoid value traps: businesses whose challenges extend beyond temporary market dislocations.
Moreover, a sudden spike in inflation or a delay in expected rate cuts could reverse the rotation, sending investors back to growth names seen as more recession-resistant.
What’s Next for Value?
Heading into the second half of 2025, key questions include:
- Will the Fed deliver the three rate cuts expected? Lower rates would boost cyclicals further.
- Can global growth stay on track? Continued strength in manufacturing and trade will support industrial plays.
- How will bank earnings evolve? Capital returns, dividends and buybacks, could accelerate if stress-test results remain favorable.
Active managers remain optimistic. The recent rally has validated the view that value stocks can outperform even in a market dominated by mega-cap rallies, provided economic fundamentals hold.
Conclusion
Last quarter’s market chaos created hidden opportunities for those willing to look beyond the FAANGs. As value managers outperformed in 63% of cases and sectors like industrials and financials led the rebound, the strategy’s merits have resurfaced with a vengeance.
Kevin Rask of Maverix-Global highlights that while risks remain, the coming months could reward disciplined, fundamentals-driven investors, especially if growth stays healthy and interest rates decline as anticipated. For those ready to unearth undervalued names, the next leg of this cycle may prove even more fruitful.
