What goes up… keeps going up. But we aren’t buying it. | U.S. equity market commentary 2Q 2024
Oakmark is the mutual fund family launched in 1991 by Harris Associates, the Chicago deep-value firm founded in 1976 (about $105bn AUM). Bill Nygren runs the flagship Oakmark Fund and David Herro the Oakmark International Fund, buying businesses at large discounts to intrinsic value and holding them like owners — publishing quarterly fund commentaries, market commentaries and insight articles.
In plain words
In the first half of 2024, the U.S. stock market rally was driven by a few giant tech stocks (like AI winners). Oakmark fund lagged because it stuck to buying cheap stocks (deep value) instead of chasing those hot names. They argue these tech giants are overpriced, pointing to past examples like Cisco and AOL that crashed after initial hype. Meanwhile, the cheap stocks they own (e.g., General Motors) trade at half the market's price-to-earnings ratio and can boost their own value through buybacks. For ordinary investors: don't blindly follow momentum; deep value may offer better bargains, and beware of index distortions (some 'value' indexes now include expensive stocks).
The Oakmark Fund returned 6% in the first half of 2024, outperforming inflation but significantly lagging the S&P 500 Index's 15% gain (a gap of 9 percentage points). The report identifies three adverse trends: mega-cap stocks (the top 25 companies in the S&P 500) rose 27%, while the remaining const
Theme and Background
This chapter discusses the extreme divergence in the U.S. stock market during the first half of 2024 and the reasons behind the Oakmark Fund's underperformance in this environment. The market exhibited three overlapping trends: mega-cap stocks, growth stocks, and momentum strategies. Oakmark, adhering to a deep-value strategy, had a portfolio that significantly deviated from these trends.
Core Thesis
The author clearly asserts that current valuations of mega-cap growth stocks have fully or even excessively priced in future expectations. Historical experience (the computer and internet bubbles) shows that winners of technological change often struggle to maintain their advantage. Oakmark refuses to chase highs and instead believes that current deep-value stocks (with an average P/E ratio half that of the market) present a rare opportunity.
Counter-Intuitive Judgment:
- The market believes the winners of AI are already determined, but the author cites historical examples like IBM, Cisco, and AOL to argue that today's high-valuation growth stocks may repeat past mistakes.
- The author argues that even without investors actively seeking mean reversion, companies can spontaneously narrow the gap between price and value through capital actions such as buybacks or share issuances.
Key Arguments and Data
1. Quantitative Comparison of Three Adverse Trends
| Trend Dimension | Winner Performance | Loser Performance | Gap |
|---|---|---|---|
| Mega-Caps vs. Rest of S&P 500 | Top 25 companies rose 27% | Remaining constituents rose only 6% | 21 percentage points |
| Growth vs. Value | Russell 1000 Growth rose 21% | Russell 1000 Value rose 7% | 14 percentage points |
| Momentum Strategy | Prior year's strong stocks outperformed weak stocks | — | 35 percentage points |
2. Historical Analogy Data
- 1980s Computer Boom: IBM was the largest company by market cap, but "IBM and the Seven Dwarfs" all lost money in computer manufacturing.
- 2000 Internet Bubble: Cisco's stock price remains below its 2000 peak, down 80% relative to the S&P 500; AOL and Yahoo! are nearly worthless.
- Currently, the S&P 500's Morningstar growth/value score is 192 (entering the "growth" zone for the first time), while Oakmark's score is 73 (an all-time low; the last time it was below 80 was in 2000).
Oakmark Fund Investor Class average annual total returns as of June 30, 2024: Since inception (1991) 12.72%, 10-year 11.17%, 5-year 14.68%, 1-year 18.01%, last 3 months -3.98%, expense ratio 0.91%
3. Valuation and Earnings Comparison
- Oakmark average forward P/E: 11x; Russell 1000 Value: 15x; S&P 500: 21x.
- Expected EPS growth for Oakmark holdings is only slightly below the S&P 500, but the valuation discount is the largest in 25 years (only comparable to 2000).
- Case study: After GM announced a 20% + 11% share buyback, its 2025 EPS estimate rose 25%, while the industry average fell nearly 10%.
4. Index Composition Distortion
- Due to the surge in tech growth stocks, Accenture (25x P/E) and Home Depot were reclassified as "value stocks"—not because they are cheap, but because their gains lagged behind tech stocks.
- Oakmark's pure value stock allocation has rebounded to nearly 70% after falling from 80% in 2000 to a low point.
Companies/Assets Involved
| Company | Role | Key Data | View |
|---|---|---|---|
| Alphabet | Oakmark's largest holding | 3.6% of portfolio, up 30% in H1 | Held but underweight relative to S&P 500, which hurt relative performance |
| Bank of America | Another mega-cap holding | Combined with Alphabet, only 6% of portfolio | Low allocation |
| General Motors (GM) | Oakmark's second-largest holding | Buyback of 20% + 11%, EPS estimate up 25% | Bullish; buybacks accelerate value realization |
| First Citizens / Corebridge | Only momentum strategy holdings | Combined only 3% of portfolio | Very small allocation |
| Cisco / AOL / Yahoo! | Historical counterexamples | Cisco down 80% relative to S&P 500; AOL/Yahoo! nearly zero | Warning that AI winners may not be durable |
| GameStop (GME) | Negative example | Issued shares to repay debt | While it depressed the stock price, it reduced bankruptcy risk |
Investment Implications
- Short/Avoid Mega-Cap Growth Stocks: Current AI-driven mega-caps (e.g., top 25 of S&P 500) are at historically extreme valuations. Lessons from the computer and internet bubbles show that winners of technological change struggle to maintain their advantage long-term.
- Go Long on Deep-Value Stocks: Oakmark's portfolio has an average P/E of only 11x, with EPS growth only slightly below the market, and a valuation discount that is the largest in 25 years. Through capital actions like buybacks, these companies can spontaneously close the valuation gap (e.g., GM case).
- Beware of Index Distortion Risk: The Russell 1000 Value Index, due to component distortion (including stocks like Accenture with a 25x P/E), no longer represents true "value." Investors should directly screen for low P/E, high buyback stocks rather than passively tracking the index.