The Case for Value Investing in a Momentum-Dominated Market

In recent years, the U.S. equity market has been increasingly dominated by momentum-driven strategies, with the S&P 500's performance heavily influenced by a narrow group of high-priced technology stocks. As of 2025, the S&P 500's price-to-earnings (P/E) ratio stands at approximately 22 times, a stark contrast to the Oakmark Fund's P/E ratio of 13 times. This divergence underscores a critical opportunity for investors to rebalance toward value-driven strategies in 2026, leveraging the Oakmark Fund's structural advantages in diversification, risk mitigation, and historical outperformance during market corrections.

The Risks of Momentum Concentration

The S&P 500's current composition reflects a dangerous overreliance on a handful of technology giants. Approximately 35% of the index is concentrated in the technology sector, with the top ten companies-accounting for just 2% of the index- representing 41% of its total market capitalization. This concentration, often referred to as the "Magnificent 7" (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla), has driven much of the market's gains in recent years. However, such heavy weighting increases systemic risk, as demonstrated by the index's near-bear market dip in early April 2025 amid trade policy uncertainty.

In contrast, the Oakmark Fund maintains a sector allocation that prioritizes diversification. Less than 5% of its portfolio is invested in technology stocks, with its largest holding comprising under 3% of the fund. This approach not only reduces correlation with the S&P 500 but also insulates the portfolio from sector-specific shocks.

Value Investing's Edge: Low P/E and Active Share

The Oakmark Fund's lower P/E ratio of 13 times in 2025 highlights its focus on undervalued, high-quality businesses. This valuation metric, significantly below the S&P 500's 22 times, suggests a more conservative approach to capital allocation. Furthermore, the fund's active share of 89.87% relative to the S&P 500 indicates a high degree of distinctiveness in its holdings, enabling investors to access a portfolio that diverges meaningfully from the broader market's momentum-driven trajectory.

Historical Outperformance During Corrections

While the Oakmark Fund matched the S&P 500's -16% decline during the 2022 market correction, it demonstrated resilience in 2023, outperforming the index during both the fourth quarter and the full year. In Q4 2023, the fund returned 12.92% compared to the S&P 500's 11.69%, and for the year, it delivered 30.89% versus the S&P 500's 26.29%. This performance underscores the benefits of active management and value-oriented strategies during periods of market volatility.

Momentum Excess and the Case for Rebalancing

Despite the success of momentum strategies in 2025- where the top quintile of U.S. stocks outperformed the S&P 500 by 43%-experts caution against overreliance on this approach. Goldman Sachs Research projects that global stocks may return 11% over the next 12 months, driven by earnings growth rather than valuation expansion. This shift suggests a more selective market in 2026, where diversified, value-focused portfolios like the Oakmark Fund could offer superior risk-adjusted returns.

Conclusion: A Strategic Shift Toward Value

As the U.S. equity market grapples with the risks of concentration and the limitations of momentum-driven gains, investors are increasingly recognizing the merits of value investing. The Oakmark Fund's low P/E ratio, reduced sector concentration, and historical outperformance during corrections position it as a compelling alternative to the S&P 500. By rebalancing toward value-driven strategies in 2026, investors can mitigate systemic risks while capitalizing on undervalued opportunities in a market poised for a more balanced trajectory.