Value stocks have outperformed growth stocks this year, with the Russell 1000 Value Index gaining approximately 20% while the Russell 1000 Growth Index has declined. This outperformance, however, is largely driven by technology companies, including some of the Magnificent Seven, which have been reclassified as value stocks.

Traditionally, value stocks trade at a discount relative to their earnings, while growth stocks are expected to increase earnings at a faster pace. The recent performance gap surprised investors until they examined the leaders of value's resurgence: tech giants like Amazon, Apple, and Microsoft. These companies were partially or fully shifted into the Russell 1000 Value Index during the index reconstitution in late June.

Coincidentally, this rebalancing occurred as semiconductor stocks, previously highflyers, began to lag, and megacap tech stocks were experiencing a downturn. The value index initially benefited from chip makers before incorporating tech giants like Amazon and Apple as they approached recent lows.