A few weeks ago, I wrote an article explaining why I’m bearish on tech stocks. Essentially, the sector has done exceptionally well, and standout performance of that sort has tended to foreshadow dreadful future returns.

In this article, I’ll take the opposite tack, focusing on areas that have performed terribly and seeing how they did after the fact. As you’ll see, I found contrarianism paid, but only when you focused on market segments whose performance would make even a billy-goat retch.

Dumpster Diving

For this analysis, I focused on historical Morningstar Category average returns. After excluding various trading-oriented categories, there were 117 of these peer groups.

I compiled each category’s rolling 10-year returns from Jan. 1, 1996, through Dec. 31, 2025. Then I looked for the worst-performing category of each rolling period and tracked its returns over the subsequent 10-year period. Here’s what that picture looked like when I plotted the worst-performing category’s prior (x-axis) and subsequent (y-axis) returns.

In general, the worse past returns were in absolute terms, the better they tended to be going forward, as evidenced by the plot’s upward slope.

(Note: This approach is not to be mistaken for the “Buy the Unloved” study, which tracks the subsequent performance of categories that have seen the heaviest outflows of assets.)

Market Beaters?

But did the worst-performing peer groups tend to beat the broader market after getting routed? I measured that too, comparing each worst-performing peer group’s subsequent return to a broad index that corresponded to its asset class as follows:

That picture was more mixed, as you can see in the following scatterplot, which is identical to the one above but color-coded to indicate each peer group’s annual excess return over the subsequent period.

Though the worst-performing peer groups always made money over the subsequent decade, they didn’t necessarily outpace the market. This was especially true of peer groups that earned modest gains, or suffered small losses, over the prior 10-year period. By contrast, peer groups that lost 5% or more a year over the previous decade were far likelier to outperform.

You had a good shot at beating the market by investing in the worst-performing areas, but you had to focus on the categories that had taken the biggest drubbing in absolute terms.

To get a sense of the resolve this took, consider the technology category. It was the worst-performing peer group of the decade ended June 30, 2010, over which it lost nearly 60% of its value while lagging the S&P by almost 7% per year. Had you bought into that on July 1, 2010, your investment would have proceeded to gain more than 17% annually over the ensuing 10 years, outperforming the index by more than 300 basis points a year.

Looking Ahead

The preceding covers all rolling 10-year periods through Dec. 31, 2015 (whose subsequent rolling 10-year period ended Dec. 31, 2025). What about the rolling periods that ended after Dec. 2015? Obviously, we can’t know how those will turn out until the full subsequent 10-year period elapses. But we can at least monitor performance to date.

To that end, here is the same plot as before for the rolling 10-year periods ended through Dec. 31, 2020. The subsequent performance shown covers the time since, which ranges from as long as nearly 10 years (that is, the rolling period ended Jan. 31, 2016) to as short as five years (that is, the rolling period ended Dec. 31, 2020).

So far, at least, these categories have rebounded from the losses they sustained in the previous decade, with each making money through Dec. 31, 2025, resoundingly so for the equity energy and equity precious metals categories, which have both risen sharply in the time since they tumbled.

Now here’s the same thing, but this time I’ve color-coded based on the range of these categories’ excess returns in the time since they underperformed.

Though there’s still time to go, the pattern is generally holding, with the categories that suffered the deepest losses faring the best versus their benchmarks and those that incurred shallower losses tending to lag.

Categories’ historical performance imparts some lessons about the potential value of, and limits to, contrarianism.

In every case, the most downtrodden market segments subsequently made money. But not every category went on to outpace its index. Rather, it was the hardest-hit areas—those that tumbled 5% per year or more over the previous decade—that went on to outperform.

As such, only those with a strong stomach and the requisite patience need apply. But for those hardy types, it appears to be a compelling signal.

Switched On

Here are other things I’m reading, watching, or listening to:

• Jason Zweig on factor funkiness
• Oakmark’s Bill Nygren: “We believe…the S&P 500 has become much riskier and therefore more akin to a concentrated growth fund”
• “Tom Verlaine Was a Mystery”
• Greg Kot’s annual mixtape
• Better late than never: “Parasite”

Don’t Be a Stranger

I love hearing from you. Have some feedback? An angle for an article? Email me at jeffrey.ptak@morningstar.com. If you’re so inclined, you can also follow me on Twitter/X at @syouth1, and I do some odds-and-ends writing on a Substack called Basis Pointing.