Since reaching the bear market bottom in October 2022, the S&P 500 has been on an absolute tear. It produced a total return of 26% in 2023, just to follow it up with a 25% return in 2024. Despite some hiccups in 2025, the index has still returned nearly 14% year to date as of this writing. That's an 80% total return in less than three years.
But stock prices have climbed higher faster than the underlying fundamentals of the businesses behind them. As a result, the S&P 500, in aggregate, has become extremely expensive. The CAPE ratio surpassed 40 for only the second time in history. The standard forward P/E measure for the S&P 500 also sits at an elevated level of 22.6, a valuation we've rarely seen since the dot-com bubble burst. And the Buffett Indicator sits at an all-time high.
Any way you look at it, the S&P 500, as a group, looks expensive.
But Bill Nygren, the investment manager at Oakmark Capital, says there are just as many appealing opportunities in the S&P 500 today as there were seven years ago, when the index looked reasonably priced. You just have to know where to look.
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The S&P 500 is very different today than it was just a few years ago
The composition of the S&P 500 has changed dramatically over the last few years. The Megacap-8 tracked by Yardeni Research has climbed from about 15% of the entire S&P 500 market cap in 2018 to about 33% today. Nygren points out that the top 10 companies in the S&P 500 account for nearly 40% of the index's value.
And those stocks at the top of the index are mostly high-growth tech stocks. They sport high valuations, but they also currently boast the earnings growth to back up those valuations, as billionaire Howard Marks points out.
Still, their heavy weight in the index has pulled up the overall valuation of the S&P 500 to record territory. And many stocks have followed along despite not producing the same earnings growth as the most valuable companies in the world. Marks says that's the concerning part of today's market valuations.
But Nygren says if you dig deeper into the S&P 500, there are still plenty of opportunities. "Even though the market has gone in the past seven years from an upper teens multiple to a mid-20s multiple, seven years ago, there were about 150 stocks under 14 times earnings; today, there are about 150 stocks under 14 times earnings," he said in a recent interview.
In other words, there are still many individual stocks where the market isn't valuing their earnings as high as others for one reason or another. An investor who can dig into the company and determine whether the market is right in discounting those earnings or not could end up outperforming in the long run with a keen value investing strategy. Nygren focuses on companies growing shareholder value over time (rising free cash flow and earnings) and management that acts in the shareholders' interests (using capital effectively or returning it to shareholders).
Nygren runs one of the most successful large-cap value funds in the market, recently launching an ETF version, the Oakmark U.S. Large Cap ETF (OAKM -0.34%). The ETF's holdings are updated daily, and the current portfolio could shed some light on where Nygren sees value in the markets right now.
Nygren's top holdings right now
The composition of the Oakmark fund is far different from the S&P 500. Nygren currently has a heavy weight in financial stocks, including Citigroup, Charles Schwab, Bank of America, and Capital One Financial. He saw opportunities in banking stocks in 2023 after the collapse of Silicon Valley Bank. Nygren pointed out many financial stocks traded at multiples around half that of the S&P 500 at the time, while they've historically traded closer to two-thirds the average P/E ratio for the index.
Indeed, financials have outperformed the overall S&P 500 since mid-2023, but they still made up nearly 40% of the Oakmark fund's portfolio as of the end of June. That suggests Nygren still sees plenty of undervalued financial stocks in the market.
Importantly, Nygren doesn't think all high-growth big tech stocks are overvalued. The fund's largest position is Alphabet (GOOG 0.85%) (GOOGL 0.75%), which accounts for more than 6% of the fund's portfolio as of this writing.
Nygren sees significant value in Alphabet because it operates what's basically a venture capital fund (Other Bets) on top of its cash cow search business. Investors are discounting the business outside of search. So, despite its forward P/E ratio above 24, the core business has a valuation that's much lower when you take out the Other Bets and cash on its balance sheet.
The Oakmark U.S. Large Cap ETF portfolio can be a great jumping-off point for value investors looking for new stock picks. Even better is learning to value a company and find stocks trading below their intrinsic value. Nygren, Marks, and many other top investment managers seem to think the current market presents ample opportunities for smart stock pickers to outperform right now.
