Value investing is gaining renewed attention as rising bond yields challenge the momentum-driven strategies that dominated markets over the past decade. The protracted period of historically low government bond yields following the global financial crisis encouraged investors to favor momentum trading, which involves buying stocks that are already rising. However, with almost risk-free government bonds now offering returns above 5 percent, this approach is facing growing headwinds.

The S&P 500 index surged about 24 percent from its low point in March despite the U.S. 10-year Treasury yield climbing from roughly 4 percent to nearly 5 percent amid concerns over budget deficits, inflation pressures linked to oil prices, and corporate debt issuance for data infrastructure projects. Nevertheless, the typical negative correlation between stocks and bonds that held earlier in the year has reversed. As the 10-year yield crossed 4.5 percent last month, the S&P 500 plateaued, followed by a four-day losing streak last week when yields breached the 5 percent mark. Similarly, Australia’s ASX 200 recorded its most significant weekly decline since March.

Reece Birtles, head of Australian equities at ClearBridge Investments, sees the recent market pullback as a correction overdue in momentum stocks. He points out that valuation disparities in equity markets approached levels seen during the dotcom bubble, the global financial crisis, and the COVID-19 pandemic by late 2024, noting that such extremes historically have not been sustained. According to Morningstar data, value investing strategies currently represent less than 7 percent of Australian equity funds under management, well below the typical allocation of around 35 percent. Birtles anticipates that these shifting conditions will lead to a rebalancing in favor of value approaches as investors adjust their portfolios.

Examining specific cases, Commonwealth Bank’s share ownership is heavily skewed toward index funds and retail investors, with only a small portion of actively engaged investors. This limited liquidity can lead to price moves driven more by passive fund flows than fundamentals. Additionally, systematic quantitative funds often rely on trending factors rather than company fundamentals, a strategy now encountering increasing volatility.

Daniel Liptak, an investment researcher at Datt Capital, notes that momentum trends are unwinding in Australia, especially in sectors like gold, resources, and banking, where price gains were decoupled from earnings growth. The ASX 200 Banks Index, for example, has fallen approximately 17 percent from its February peak. Yet, some caution against dismissing momentum entirely. Claudia Kwan, portfolio manager at NorthStar, highlights that momentum cycles continue but shift over time, citing the volatile performance of South Korea’s KOSPI index as an example tied to changing bond yield environments globally.

Economic experts underline that the era of ultra-low interest rates has ended. Adam Boyton, Australia and New Zealand Banking Group’s head of economics, describes a landscape characterized by higher inflation, sustained elevated yields, and slower economic growth. As U.S. 10-year Treasury yields surpassed 5 percent, Australia saw its benchmark bond yields reach a 15-year high around 5.4 percent.

JPMorgan reports that the equity risk premium—the additional return investors demand from stocks over bonds—has dropped to 2.1 percent, its lowest point since 2002, intensifying valuation pressures. Willis Tsai, head of equities at global manager Nuveen, overseeing $1.4 trillion in assets, emphasizes that while rising yields increase the cost of capital and challenge valuation metrics, they should not prompt wholesale equity sell-offs. Instead, he advocates for selective stock picking, focusing on sectors such as industrials, materials, real estate, and energy, which have received limited investor attention during the recent technology-driven rally.

Birtles concurs that value opportunities are emerging, though he advises patience given the lengthy period of underperformance value investing experienced through the 2010s. He points to his own investments in companies like CSL, which he acquired at depressed prices when the healthcare sector was broadly out of favor. In this environment, crowded momentum trades may carry elevated risk, while neglected value stocks could offer promising upside as bond yields continue to rise.