Key Points
It’s no secret that the market has been dominated by tech, growth, and the “Magnificent Seven” stocks over the past few years. The earnings and GDP growth backdrops are certainly there that could help propel this trend further into 2026. But it’s also prudent to consider that a rotation out of these leaders is possible.
Value stocks have had their moments, but they’ve been unable to produce any kind of sustained period of outperformance since 2022. As the economic landscape changes, the artificial intelligence (AI) trade starts to tire out, and investors consider repositioning heading into the new year, there’s reason to think that value stocks could begin making a comeback.
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Let’s take a look at why the Vanguard Mega Cap Value ETF (NYSEMKT: MGV) is looking particularly attractive right now.
Image source: Getty Images.
Why conditions favor a market rotation
At a high level, conditions would seem to favor more upside for equity prices. The U.S. economy just grew at a 4.3% annualized rate in Q3 2025. The unemployment rate is still in the 4% to 5% range. Inflation is holding around 3%. All of these would point to an economy growing at a healthy pace with low risk of recession.
But there are a few warning signs that the market could begin to shift.
The estimated year-over-year earnings growth rate for the S&P 500 (SNPINDEX: ^GSPC) in Q4 2025 is 8.3%. That’s solid, but it’s also below the five-year average growth rate of 14.9% and the 10-year average growth rate of 9.5%. Again, that’s a healthy number, but it’s also below average relative to what we’ve seen recently.
Also, consider that the unemployment rate has risen from 4% at the beginning of the year to 4.6% in November 2025. The inflation rate, while contained, is still well above the Federal Reserve’s 2% target. Tariffs are also raising the cost of a lot of items for consumers.
All this is to say that while the economy still appears to be expanding, it may not be the kind of environment that supports growth stocks in the way that it has.
Why the Vanguard Mega Cap Value ETF (MGV) makes sense right now
MGV invests in a very different set of stocks than what you’d find in a growth or even an S&P 500 ETF. Instead of heavy allocations to tech and the Magnificent Seven, value investing consists of overweights to financials, healthcare, and industrials.
Here’s how each of these sectors could outperform over the next 12 months:
- Financials: As of right now, it looks like the Fed may not be able to cut rates as aggressively as it might like. Higher rates benefit banks and financial companies because it improves their margins. The investment banking and IPO markets are also looking strong.
- Healthcare: Not only should this sector benefit from a defensive shift, but it has a strong narrative around it. Healthcare is likely a big beneficiary from President Trump’s push for deregulation. Big advances in weight loss drugs, medical devices, and AI implementation should improve profitability longer-term.
- Industrials: This sector is likely to benefit from two themes: defense spending and AI infrastructure. The demand for data centers is huge, and industrial firms will be behind the buildout. Geopolitical tensions emphasize the importance of aerospace and defense, two areas likely to continue receiving substantial investment.
The Vanguard Mega Cap Value ETF has a combined 59% allocation to these three sectors. Plus, the fund trades at just 21 times forward earnings, about half of the 40 multiple of the Vanguard Mega Cap Growth ETF (NYSEMKT: MGK). This could provide an important downside cushion should economic fundamentals deteriorate.
Why I choose the Vanguard Mega Cap Value ETF as a strong buy
MGV offers balance in a market dominated by tech and growth stocks. No segment of the market outperforms forever, and the three-year run for those stocks is due for a pause.
The Vanguard Mega Cap Value ETF offers not only diversification away from the major indices, but exposure to under-the-radar sectors from the strong investment cases. This isn’t just moving away from recent leaders for the sake of moving away. It’s about finding strong value in the next market opportunities. MGV has plenty of those.
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David Dierking has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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