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Unless you've been living in a cave, you are likely aware that the "Rotation Trade" has been the toast of the town this year. Apparently the powers that be decided that the stock market was going to look a lot different in 2026 than it has over the last several years. You know, where companies that have been growing at remarkable rates have led the way - while the rest of the market's "troops" lagged badly. As in, very badly - for a very long time.
So, as is often the case on Wall Street, the trading desks at the big banks and hedge fund managers decided it was time to flip the script in the new year. Time for a good ol' mean reversion trade. Time to sell the leaders and buy the laggards. I.E. Time to sell megacap tech and buy the old economy, staid, defensive/cyclical/value names such as Walmart (WMT), Procter & Gamble (PG), Coca-Cola (KO), Hershey (HSY), Colgate (CL), Kroger (KR), Caterpillar (CAT), etc.
Such "trades" are not new. No, mean reversion trading has been around for eons. When something is perceived to have "gone too far," traders sell the winners and buy the losers - for a trade. And when the spread between the two themes closes up, so too does the trade. But it is certainly fun while it lasts if you get the timing right.
Right now, the trade appears to be in full swing. If my calculator is correct, all but two of the "Mag 7" stocks are in the red to start 2026 as the Magnificent Seven ETF (MAGS) is down nearly -6% year to date and Vanguard's Growth ETF (VUG) is off -5.5%. At the same time, the value space has been rockin' with iShares Value ETF (VLUE) sporting a gain of +10.7% through the end of last week.
Usually, Rotation Trades Have Limitations
To be sure, I enjoy a good mean reversion trade as much as the next guy. The problem, from my perch, of course, is that these types of trades can only go so far. For example, the value stocks aren't curing cancer or revolutionizing computing, robotics, space, or energy. While this is merely my $0.02 opinion, Colgate can only sell so much toothpaste. Sales of Coca-Cola (KO) and Pepsi (PEP) are not likely to skyrocket. And Walmart (WMT) doesn't have limitless upside. So, at some point, the joyride to the upside in these types of trades tends to end.
While trying to call tops and bottoms of any type of trade is a fool's errand, it is worth noting that an awful lot of the value-oriented stuff is suddenly overbought and overvalued. As in, very overvalued. As in, more overvalued than the big tech names that our furry friends so publicly whine about almost daily.
As my son, Don Moenning, recently opined in his weekly market update, "We now find ourselves with a glut of low margin, low-growth defensive names trading in a parabolic fashion on the charts at P/E's that would make big tech blush." He notes that the current P/E for Walmart (WMT) is 46.9, Kroger (KR) is 64.2, Hershey (HSY) is 51.1, and Colgate-Palmolive (CL) is 36.8. Don suggests we compare those multiples to that of Microsoft (MSFT) at 24.2, Amazon (AMZN) at 28.1, or Alphabet (GOOGL) at 28.8. Don continues with, "the question remains, "but why?"
Why does Nvidia (NVDA), which, according to my favorite LLM, sports revenue growth above 60% (Grok says the 3-yr growth rate is 65%, the 5-yr is 66%, and 2026 projection is 64%) trade at a P/E multiple even with Walmart (WMT) - and well below Kroger (KR) and Hershey (HSY)?
And for those keeping score at home, Nvidia's PEG ratio (P/E divided by its growth rate) is currently around 0.6 - generally, PEG ratios below 1.0 are considered "bargains". Compare this to CL's PEG of 1.6, KR's of 1.44, and WMT's eye-popping 3.37.
For comparison, Walmart has been growing revenues in the 5-6% range, which, of course, is impressive for a company of its size. Colgate's revenues have been growing at a rate below 2%. And while the forecast is looking up for 2026, 3-4% growth is tough for me to get excited about from a long-term investment perspective.
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