The turbulent season of the US stock market brings a "highlight moment" for value investing

According to the Zhitong Finance APP, in the U.S. stock market, value investment strategies have long been neglected, and the last quarter was no exception—when the market staged a strong rebound, indices composed of sold-off stocks lagged far behind. However, this has created a highlight moment for stock pickers focused on uncovering undervalued companies. Data compiled by Jefferies shows that about 63% of actively managed funds investing in low-priced large-cap stocks outperformed their benchmarks in the second quarter, marking the best performance since the depths of the pandemic in 2020.

While the market's attention was focused on the super giants leading the rebound from the April lows, discerning fund managers discovered rich opportunities in the value trough. According to Jefferies statistics, value funds have significantly entered the industrial sector (which saw an 11% increase last quarter, in line with the S&P 500 index), while avoiding alternatives to bonds such as utilities, consumer goods, and real estate—these were the worst-performing sectors in the Russell 1000 Value Index.

The economically sensitive industrial sector has emerged as a strong performer, releasing positive signals for beleaguered value stocks. With the economy remaining robust and the prospect of interest rate cuts becoming clearer, some market observers expect this sector to experience a broader recovery.

Jefferies equity strategist Steven DeSanctis stated, "We believe the economy will not fall into recession, and value stocks should perform better. Additionally, we expect three interest rate cuts in the second half of 2025, and a low-interest-rate environment is particularly favorable for cyclical and value stocks."

Value Hunting in Progress

Although value stocks still lag behind growth stocks in absolute terms, the excellent performance of value stock pickers relative to benchmarks stands in stark contrast to the dismal performance of growth funds. Jefferies data shows that large-cap value funds outperformed their benchmarks by 1.7 percentage points last quarter, while growth funds lagged by 0.3 percentage points during the same period.

Warren Buffett's "cigarette butt" investment philosophy, which had faded amid the high-growth, high-risk technology and artificial intelligence wave, is now regaining vitality. Over the past week, the value factor has dominated among the 12 style factors tracked by Bloomberg.

The S&P 500 Industrial Index (covering manufacturing and transportation companies) has approached historical peaks amid expectations of economic recovery fueled by easing trade tensions. This sector has become the best-performing industry over the past six months, with the U.S.-China trade truce and resilient economic data playing significant roles.

The financial sector is another main force behind the rebound of value stocks, ranking as the third strongest sector in the S&P 500 since the beginning of the year. After 22 major U.S. banks passed the Federal Reserve's stress tests, this sector regained its upward momentum—not only validating the banking industry's crisis resilience but also igniting a wave of stock buybacks and dividends.

The KBW Bank Index, which tracks major U.S. banks, has surged nearly 40% since its low in April