US equities Diversify beyond growth with large-cap value

Value stocks can play an important role in building a diversified portfolio across different market environments. Here are five key points to keep in mind about large-cap value investing.

1. The role of large-cap value in a diversified portfolio

Value and growth represent two distinct stock investing styles — the classic tortoise and hare dynamic. Value stocks generally trade at lower valuations and are often steadier, exhibiting lower volatility than growth stocks — particularly during more volatile market periods. Growth stocks, by contrast, can be more dynamic in strong markets, with higher volatility but the potential for outsized returns.

Neither style is inherently better. Over time, both have delivered competitive results, though they come with different characteristics and risk profiles. Because of these differences, owning both in a well-diversified portfolio may be advantageous, because their complementary traits may help navigate shifting market environments. Including a large-cap value allocation can broaden diversification and provide exposure to a differentiated stock style. It can also support more balanced long-term outcomes by helping portfolios adapt to changing economic conditions.

Stocks with lower P/E ratios indicate that investors are paying less for every dollar of earnings received. Stocks with higher PE ratios indicate investors are paying more for every dollar of earnings received.

2. Understand the growth–value cycle

Large-cap value and growth stocks have historically taken turns leading the market, depending on economic cycles and broader conditions.

• Value has tended to lead during softer economic periods, rising-rate environments, and higher inflation
• Growth has led more often during economic expansions, falling rate environments, and low inflation

Recently, large-cap growth, based on the Russell 1000 Growth Index, outperformed large-cap value, based on the Russell 1000 Value Index, for an extended period, supported by low interest rates and strong returns from megacap technology companies [see table below]. Periods of prolonged leadership aren’t unusual, but they tend to change over time as market conditions shift.

These shifts matter because annual leadership changes compound over time, shaping cumulative investment returns. While performance has tended to even out over the long term, shorter-term leadership cycles can be both meaningful and prolonged.

3. Rotation and market broadening

A small group of megacap companies has driven a significant portion of US stock market returns for the past several years. At one point, they represented about one-third of the S&P 500 Index. While this concentration has supported strong performance, it has also increased reliance on a limited number of names.

Recently, there’ve been signs of improving market breadth — going from “top-heavy” to more balanced. Equal-weighted indexes and smaller-cap segments have shown relative strength over shorter time periods — an early signal that leadership may be broadening.

Historically, broader market participation has created a more supportive environment for value-oriented sectors such as financials, industrials, energy, and parts of healthcare. As leadership expands, a wider group of companies may contribute to returns, reducing dependence on a narrow set of market leaders.

Equal-weight vs. cap-weight trends

• Shorter timeframes: Equal-weight has outperformed cap-weight
• Longer timeframes: Cap-weight has led
• Takeaway: The average stock has begun to close the gap, consistent with early-stage broadening

Market broadening doesn’t necessarily mean growth stocks will sharply underperform. Instead, it has often resulted in a rotation where growth continued to perform, but no longer dominated overall returns. Diversification and stock selection can become more important as return drivers expand across sectors and styles.

value in an inflationary environment

While inflation has moderated, it remains a meaningful factor in the current economic backdrop. Historically, value stocks — those trading below their intrinsic worth — have tended to perform well during periods of moderate to higher inflation. The companies often exhibited durable fundamentals, stable cash flows, and pricing power, which had helped them navigate inflationary pressures more effectively.

5. Investing through a value lens

• When considering investing in large-cap value, keep these things in mind: Stay grounded in fundamentals. Short-term prices may not reflect intrinsic value. A disciplined focus on fundamentals helps avoid chasing sentiment and supports long-term decision-making.
• Use volatility as an opportunity. Market dislocations can create opportunities to invest in quality companies at attractive valuations when prices disconnect from underlying fundamentals.
• Avoid chasing market leaders. Maintain discipline and consistency. Market pricing can diverge from true value, particularly during periods of strong momentum.

When choosing a large-cap value investment, consider these things:

• Proven long-term performance. Because value strategies often invest in out-of-favor stocks, evaluating performance across full market cycles — including periods of volatility — is critical.
• Team and process consistency. It’s important to understand whether the current investment team and process are responsible for the long-term track record, and whether they’ve demonstrated an ability to avoid value traps, stocks that appear undervalued but lack potential for growth
• Style integrity. Look for strategies that consistently exhibit true value characteristics, rather than drifting toward growth during certain market environments.

What large-cap value offers Adding an allocation to large-cap value may help build more resilient stock allocations by diversifying across styles and sectors. Plus, in an environment with evolving market leadership, persistent inflation, and signs of broadening participation, value strategies can serve as a complementary counterbalance to growth and provide a wider range of return drivers rather than a narrow set of market leaders.