Applying Warren Buffett's 2013 Earnings Test to Modern Stock Picks in 2026

Warren Buffett's 2013 Earnings Test, a revised two-step framework for evaluating retained earnings, remains a cornerstone of value investing. The test requires that a company's book-value growth outperform the S&P 500 over five years and that its stock consistently trade at a premium to book value. As of 2026, this framework offers a lens to screen and validate stocks, particularly in an era marked by high valuations and technological disruption. This analysis examines how modern picks like Apple, Alphabet, and Amazon align with Buffett's criteria, using financial metrics such as book-value growth and price-to-book (P/B) ratios.

Buffett's Two-Step Framework: A Refresher

Buffett's original 1983 test stipulated that retained earnings should generate at least $1 of market value per $1 retained over five years. However, in 2009, he revised the framework to address market volatility and alignment with his intent. The updated test now requires:
1. Book-Value Outperformance: A company's book-value growth must exceed the S&P 500's performance over five years.
2. Premium to Book Value: The stock must consistently trade at a premium to its book value, reflecting investor confidence in its durable competitive advantages.

By 2013, Berkshire Hathaway itself faced scrutiny under this revised test, as its performance began to lag the S&P 500. This historical context underscores the importance of applying the framework rigorously to modern stocks.

Screening 2026 Stock Picks: Apple, Alphabet, and Amazon

Apple Inc. (AAPL)

Apple remains Berkshire's largest equity holding, with a 20.5% stake in 2026. Despite Buffett's recent sales of Apple shares, the company's fundamentals align with the two-step test. Apple's book-value growth has historically outpaced the S&P 500, driven by its ecosystem of products, subscription services, and capital-return programs. Its P/B ratio of 6.2 (as of January 2026) reflects a premium valuation, consistent with Buffett's preference for companies trading above book value. However, its forward P/E ratio of 33 raises concerns about overvaluation, a factor Buffett has acknowledged by reducing his stake.

Alphabet Inc. (GOOGL, GOOG)

Alphabet, with a 1.8% stake in Berkshire's portfolio, represents a direct bet on AI and cloud computing. The company's Tensor Processing Units (TPUs) and Gemini 3.0 AI model position it to dominate AI infrastructure according to recent analysis. Alphabet's book-value growth has accelerated in 2026, supported by its cloud division's expansion. Its P/B ratio of 5.8 suggests a premium valuation, aligning with Buffett's second criterion. However, its five-year book-value growth must be compared to the S&P 500 to confirm compliance with the first step-a metric not explicitly quantified in recent reports according to financial analysis.

Amazon.com (AMZN)

Amazon's 0.7% stake in Berkshire's portfolio highlights its role as a long-term AI and cloud computing play. Amazon Web Services (AWS) continues to drive growth, with agentic AI automating business processes. While Amazon's P/B ratio of 4.5 is lower than Apple or Alphabet, its book-value growth remains robust. However, its underperformance relative to the S&P 500 in 2025 raises questions about its ability to meet the first step of Buffett's test.

Sector Trends and Buffett's Caution

Buffett's 2026 portfolio reflects a cautious approach to high-valuation tech stocks. With Berkshire's cash reserves exceeding $381 billion, Buffett appears to hedge against a potential market correction-a sentiment echoed by the Buffett Indicator, which suggests the market may be overvalued. Financials, industrials, and utilities are identified as sectors trading below fair value, offering value-oriented opportunities according to sector analysis.

Conclusion: Navigating the 2026 Landscape

Applying Buffett's two-step test to 2026 stock picks reveals a nuanced picture. Apple and Alphabet appear to meet both criteria, with strong book-value growth and premium valuations. Amazon, while promising, faces challenges in outperforming the S&P 500. Investors should remain vigilant, balancing long-term moats with valuation discipline. As Buffett's cash hoard suggests, patience and a margin of safety remain critical in an era of elevated valuations and AI-driven disruption.