Equities

Why Q1 didn’t mark a comeback for low P/E stocks

April 28, 2026 - 12 min

William C. Nygren, CFA

Partner, Portfolio Manager and Chief Investment Officer – U.S. – Harris | Oakmark

Michael A. Nicolas, CFA

Partner, Portfolio Manager, Investment Analyst – Harris | Oakmark

At a very high level, we think the AI fears are overly generalized in many instances.

The competitive advantage of many software companies was never that they were the most efficient or the cheapest developer of software or code. It's that they have lock-in with their customers. It's that they're integrated with a number of other applications and systems. It's that they house all the data, that they're the system of record, that they're reliable, that they're safe. And all of that comes with high switching costs and pricing power. Our software companies expect to be AI beneficiaries, not victims here. And they're going to adopt a lot of these same tools and integrate them and deliver them to their clients.

But maybe stepping back, wading into controversy after sharp declines in the market is nothing new for us. In just the past six years, we've had to contend with COVID, the ensuing growth stock massacre in 2022, the regional banking crisis in '23, the tariff tantrum in '25, and now the saaspocalypse in '26. And in each instance, we've attempted to capitalize on businesses that we thought were being kind of indiscriminately sold off, as the market tends to paint with a broad brush.

The dispersion that we saw wasn't limited to the Russell. I think if you zoom out more, the performance dispersion was extreme in the S&P, as well. The 50th best stock in the S&P 500 outperformed the 450th by some 45 percentage points this quarter. That's that P90 through P10 spread that we're showing. And that divergence is about as wide as we've seen since the COVID shutdown.

Now, to us, that wide dispersion spells opportunity. The broader market moves were somewhat muted, but the divergence under the hood was pretty significant. And when it gets this wide, it allows us to rotate out of names that are near our sell target and to reinvest into more attractive opportunities that are trading at deeper discounts to our estimate of intrinsic value.

Key takeaways

Q1 market performance was not driven by a rebound in low P/E stocks, despite strong Russell 1000 Value results.
Index construction has led higher multiple stocks to play an outsized role in “value” benchmark performance.
Wide dispersion across sectors and stocks is creating opportunities for active value managers.
Harris | Oakmark increased portfolio activity in Q1 to take advantage of valuation dislocations.
The team remains focused on intrinsic value, free cash flow, and long term fundamentals.

In the first quarter of 2026, U.S. equity markets delivered negative headline performance – but the story beneath the surface was far more nuanced.

In this Harris | Oakmark webinar, Bill Nygren, CIO-U.S., and Michael Nicolas, Portfolio Manager, explored why Q1 didn’t mark a traditional comeback for low P/E stocks, despite strong relative results from the Russell 1000 Value Index.

They emphasized that recent index performance has been driven by a narrow set of higher multiple stocks, underscoring how much the value benchmark itself has evolved.

The discussion highlighted the unusually wide dispersion across sectors and stocks, which the team believes is creating a fertile environment for active value investors.

While momentum driven areas continued to lead index returns, many fundamentally strong businesses (particularly in sectors such as software and financials) experienced sharp declines, improving their valuations. Harris leaned into this dislocation during the quarter, increasing portfolio activity to upgrade business quality while maintaining a meaningful valuation discount versus major benchmarks.

They also shared perspective on longer term portfolio construction, noting that elevated index concentration and historically wide valuation spreads may have implications for forward returns. The team reiterated their focus on intrinsic value, free cash flow generation, and business fundamentals (rather than index composition) as they continue to identify selective opportunities in today’s market environment.

The information, data, analyses, and opinions presented herein (including current investment themes, the portfolio managers’ research and investment process, and portfolio characteristics) are for informational purposes only and represent the investments and views of the author and Harris Associates L.P. as of April 2026 and are subject to change without notice. This content is not a recommendation of or an offer to buy or sell a security and is not warranted to be correct, complete or accurate.

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Equity securities are volatile and can decline significantly in response to broad market and economic conditions.

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