One of the stock market’s last havens is now at risk

One of the last places to hide from this year’s stock-market turbulence is in danger.

Value stocks, or shares trading at low multiples of their book value, have quietly marched toward a banner year. Now the war in the Middle East is threatening to upend the trade, leaving investors few places to find refuge from fears over everything from rapid advances in artificial intelligence to geopolitical conflict.

The Russell 1000 Value Index is up 2.4% so far this year, beating the Russell 1000 Growth Index, which is down 9.1%, by the largest margin since 2022. Meanwhile, the S&P 500 index is down 3.8% and recently notched its worst quarter in nearly four years.

Some of the stocks leading the value index higher are flash memory maker Sandisk, up 196% this year; Moderna, up 67%; and Acadia Healthcare, which has added 69%.

But the gains for many value stocks are now at risk, with the escalating conflict in Iran roiling the stock market, sending oil prices ratcheting higher and sparking fears of an economic downturn. The Russell 1000 Value Index has fallen 4.3% since late February, when the U.S. and Israel launched a strike on Iran.

Shares of Nike have declined 29% over that stretch, while home builder Lennar and Southwest Airlines have each slipped about 24%. Shares of banks, utilities and others closely linked to the economy—which often fit the bill of value stocks—have also fallen during that stretch.

“The wall of worry is under full construction,” said Terry Sandven, chief equity strategist at U.S. Bank Asset Management.

Stocks saw some respite in the early days of April, ending last week with gains. In the coming week, investors will get a better look at the health of the economy from fresh manufacturing data and a new read on inflation. Companies will also begin reporting earnings, with results due from Delta Air Lines and Constellation Brands.

Value stocks began their ascendance months ago, with investors growing skeptical about the billions of dollars being funneled into AI technology and the threat that its tools pose to software companies. Some also picked up blue-chip stocks and shares of smaller companies in a bet that President Trump’s tax cuts and deregulation, as well as interest-rate cuts from the Federal Reserve, would help ignite an economic rebound.

“That’s been a little bit on hold now,” said Travis Prentice, chief investment officer of Informed Momentum.

One segment of value stocks that have seen a boost from the war: energy companies. The S&P 500’s energy sector is up 33% for the year, with the shutdown of the Strait of Hormuz sending oil prices to their highest levels since 2022, when Russia’s invasion of Ukraine sent prices over $100 a barrel. The energy sector is the top-performer of the S&P 500’s 11 sectors.

The rally in value stocks marks a shift from the dominating trend since the financial crisis. Growth stocks have largely beaten value shares, fueled by the dizzying run-up of big tech companies such as Apple and Nvidia that have helped power stocks to records and historically expensive levels.

“We just got so carried away,” said Jimmy Chang, chief investment officer at Rockefeller Global Family Office. “People started to question the sanity of all that.”

Value stocks remain much cheaper than big tech stocks. An exchange-traded fund tracking the Russell 1000 Value Index recently traded at 16 times projected earnings over the next 12 months, according to FactSet. Companies in the Russell 1000 Growth Index ETF traded at 24 times.

Some investors say they still expect big tech shares to outperform value stocks in the long run. Inflation has remained relatively steady, despite fears last year that Trump’s tariffs would send prices higher.

Earnings growth is also expected to be robust. Companies in the information-technology and communication-services sectors are expected to see profits jump by around 37% and 13%, respectively, this year, while industrials and financials’ earnings are projected to grow in the single digits, according to FactSet.

Still, some analysts warn that all bets are off if a prolonged war sets off an economic downturn, though most economists don’t currently expect a recession.

“That will hurt all value and growth stocks,” said U.S. Bank’s Sandven.

Write to Krystal Hur at krystal.hur@wsj.com