Market Rotation Ahead? Why Value Stocks May Outshine Big Tech

Key Points

• As the value stocks spread to growth stocks reach a cyclical low, it becomes clear for investors where opportunities might be found.
• Institutional capital has already started to rotate in some stocks, reiterating the theme of moving away from growth and toward value.
• Some of the big tech names in the market might be at risk of a potential downturn, something Buffett has acted on.

The stock market is going through a historical cycle right now, and most investors aren’t aware of it, given the composition and weighting of the broader S&P 500 and Nasdaq-100 indexes. Considering that these indexes hold mostly stocks inside the technology sector, a concentration of stocks and industries might impact the way investors measure the true performance of financial markets at the moment.

With this in mind, there is one significant indicator, a spread, that typically signals where the markets might swing next in the coming months. This spread can be taken out of the difference between the iShares S&P 500 Value ETF NYSEARCA: IVE, which represents value stocks, and the iShares S&P 500 Growth ETF NYSEARCA: IVW, which represents growth stocks overall.

Whenever this spread gets to lows such as the ones being spotted today, a rotation is sure to follow shortly back into discounted stocks and out-of-growth stocks that might have already priced in these future forecasts. This is exactly why investors need to start watching names like Berkshire Hathaway Inc. NYSE: BRK.B, Apple Inc. NASDAQ: AAPL, and Microsoft Co. NASDAQ: MSFT as this rotation might impact them all in different ways.

What Is Warren Buffett’s Berkshire Doing?

Over the past quarter, it has become clear that Warren Buffett, the market’s gauge of value and market sentiment, has been scaling out of these growth names in technology to hunt for more favorable valuations in different sectors. This theme is clear to investors who spotted Buffett’s recent selling of Apple stock.

Remove Ads

At the same time, Buffett’s cash pile for Berkshire has now been at the highest level since the dot com bubble of the early 2000s. With these two gauges in mind, investors should be wary of what might be a potential danger to their current portfolios and where a bit of safety could be found; here’s Buffett’s answer to that.

The energy sector caught the value investors’ eye, as he decided to buy up to 29% of Occidental Petroleum Co. NYSE: OXY. When investors note how much oil prices have underperformed other commodities like oil over the past year, it becomes clear that a rotation in that market could be overdue as well.

With this in mind, it shouldn’t be a surprise for investors to see those from Truist Financial boost their holdings in the Consumer Staples Select Sector SPDR Fund NYSEARCA: XLP as of late January 2025. With a boost of 11%, this bank is now holding up to $216.4 million worth of this fund, which can be taken as a defensive move in the months to come.

Is Big Tech in Trouble Now?

While not guaranteed, this value-to-growth spread has acted as a reliable gauge of where the market (and the economy) might have to shift. If the same relationship holds in the coming quarters, then it might signal a potentially bearish price path for the bigger technology names in the market.

This might be one reason why there was a net outflow of $28 billion in institutional capital taken away from Apple stock over the past quarter alone. The majority of this selling might be accredited to Buffett, but others seemed to follow.

Wealthgarden sold its entire $2.2 million position in Apple as of February 2025, just like Arbor Investment Advisors, which sold half of its $6.3 million position as well. So far, the theme for big tech names is turning bearish ahead of the rotation into value stocks.

For Microsoft, the story rhymes. The stock is now trading at 88% of its 52-week high after a 10% decline on a weaker outlook in its earnings announcement.

Based on this new information, up to $20 billion of institutional capital has been withdrawn from the stock over the past quarter.

Investors can also gauge the market’s sentiment toward this big technology rotation by comparing the current valuation multiples in these stocks to the broader industry peer group. For Microsoft, a 33.1x price-to-earnings (P/E) ratio would mean a steep discount to the industry’s 66.3x valuation.

Apple, following in closely with Microsoft, now trades at 36.2x P/E, also well below the industry’s average.

Value investors would argue that this discount only makes these stocks more attractive to buy, and they might be right if taking a multi-year time horizon.

However, for those looking to have a good quarter or two coming up, seasoned traders would remind them that markets will always discount stocks that they believe won’t grow enough to keep up with the broader peer group or industry.

This factor, combined with the current value-to-growth spreads, suggests investors should be careful about holding these big tech names today.