Equities

Why the narrowest market in decades could be a generational gift for investors

August 31, 2026 - 5 min

Global equity markets are jittery. With US and global indices increasingly concentrated in a small number of megacap tech stocks, any changes in the AI narrative whipsaw markets up or down. While this concentration is a growing risk for investors in passive, cap-weighted indices it’s also an underappreciated opportunity for active investors.

The illusion of the broad market

To understand the scale of the current opportunity, one must first dissect the sheer narrowness of recent market performance. While it’s well known that the performance of a small number of stocks is driving the major indices, it’s less well known that most stocks are lagging the index, and how rare this is. As Bill Nygren, co-CIO of US Equities at Harris l Oakmark, recently observedⁱ:

We've had three years in a row now where more than 70% of the stocks have lagged the S&P 500. The last time that we saw a 70% reading was in 1999, preceded by 1998. And in the last 35 years, those are the only five years where we've seen such a narrow market.”

Source: Harris l Oakmark, FactSet. Data as of 6/30/2026.

There has also been a very narrow rally in international equity markets. While industries within the technology sector have been the biggest positive contributors, other industries within the technology sector have been the biggest negative contributors.

Source: FactSet, MSCI World Ex US, as of 6/30/26.

And as David Herro, Co-CIO for International Equities, Harris l Oakmark, points out, this has completely swapped around from previous years:

Right now, software and services, which used to be a growth investor's favorite…are now down to low double digit earnings. And if you look at semiconductor equipment, which used to trade at very low multiples because they were deemed to be cyclical, now trade at over 30 times earnings…we don't really believe this is sustainable.”

Upgrading quality at a deep discount

This narrowness makes holding now-highly-concentrated indices increasingly risky. However, it also serves as a considerable opportunity for active managers who can buy quality companies at lower prices.

The relentless crowding into mega-cap technology has meant former growth darlings have been overlooked. High-quality businesses with high returns on capital and deep competitive moats have now been forced further into value territory.

This is an opportunity that the Harris l Oakmark teams have been taking advantage of according to Alex Fitch, co-CIO of US equities :

We internally rank every company on business quality and management quality. If you look at our US holdings today, they are invested in higher quality companies on those internal ratings than at any point in the last decade.”

This dynamic is equally visible internationally. High-quality consumer facing businesses, industrial distributors, and capital-light financial services providers have been largely ignored by many investors simply because they’re not involved in the AI infrastructure supply chain. Investors can now put together portfolios of companies that exhibit far superior returns on equity, and structural earnings growth, than the broader benchmarks.

If investors reorient portfolios in this fashion it can reduce overall portfolio risk by transitioning assets out of high-multiple, high-expectation tech giants and into high-quality businesses priced at much lower valuations.

What will make the market care?

While this valuation gap is well known, it has existed and persisted for many years now. This raises the inevitable question from sceptics: what is the catalyst that can close this valuation gap?

In the short term, the market is driven by momentum and passive fund flows. However over the medium and long term, fundamentals reassert themselves. And while nobody knows when the gap will close, it always closes eventually. For Bill Nygren and Alex Fitch, while lagging the benchmark is uncomfortable there are several facts that confirm they are on the right track.

Firstly, many of the companies they are invested in are not waiting for the market to price their businesses appropriately but are taking matters into their own hands by returning capital to shareholders through dividends and repurchases. Rather than waiting for passive flows to rotate, these management teams are buying back large amounts of their own shares at what they see as cheap prices. For some Harris l Oakmark strategies the total level of capital return across their holdings is at around 10%, the highest premium in 30 yearsⁱⁱ. When the people closest to the business are buying their own shares it not only validates investors views’ it also grows per-share value from within and drives future share price appreciation.

Secondly, while many active managers have avoided the most highly-valued tech giants, and consequently lagged their cap-weighted benchmarks, this doesn’t mean their absolute performance has been poor. As Bill Nygren reflectsⁱⁱⁱ:

If you had told us a decade ago that we could compound client capital at north of 13% a year through a period of 3% or so average inflation, we would have locked that in on the spot. None of us anticipated that there would be a sector (IT) in which we've historically had few investments, perform so extraordinarily well that those absolute returns would look disappointing in a relative sense.”

How risky are you prepared to be?

This highlights a critical point for investors: absolute economic conditions remain highly supportive of corporate equities and solid, less risky returns can be found by diversifying away from megacap tech. Corporate balance sheets are robust and many companies ignored by the AI momentum trade are growing their earnings at double-digit rates. While many risk-aware investors have frustratingly lagged their benchmarks in recent years, they may still have been compounding their wealth at historically attractive rates, at lower overall risk.

Bill Nygren and Alex Fitch certainly feel positive about the future and believe their strategies are worth consideration for any investors wanting to diversify away from megacap tech and so increase diversification and reduce portfolio risk, but retain exposure to US equities as Alex outlines:

Big picture—it’s an unusually concentrated market, and we look more dissimilar from the benchmarks than we ever have. That certainly hasn't been good for relative performance recently, but we nonetheless continue to believe in the portfolio and our process. We continue to eat our own cooking, with most of our net worth invested in the funds, and we believe our current positioning bodes well for the future, regardless of what happens with the AI boom.”

Source: FactSet, 6/30/2011-6/30/2026, data is quarterly. Top five S&P 500 holdings as of 6/30/2026 were Nvidia Corp, Apple, Alphabet (Cl A&C), Microsoft Corp, and Amazon.com.

Oakmark Fund vs. S&P 500 Index correlation

Source: Harris, 6/30/2011-6/30/2026, correlation of Oakmark Fund vs. S&P 500 Index trailing 2-year monthly returns.

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Disclosure

ⁱ Harris l Oakmark, July 21, 2026 webinar: “US Equities: when growth drives the value rebound”

ⁱⁱ Harris l Oakmark, July 21 webinar, as above.

ⁱⁱⁱ Ibid

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