AI euphoria meets value discipline, who blinks first?
- Tor Martin Flesvik
- Aug 18
- 6 min read
Updated: 5 days ago
By: Tor Martin Flesvik
Partner & Head of Equity Research
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Who needs earnings when you have AI magic?
Let me walk you through some revealing mathematics. If we assume Palantir maintains its current growth trajectory but trading at Nvidia's 2023 peak valuation multiple of approximately 35 times sales, the stock will need to fall roughly 75% from current levels to reach that "reasonable" extreme valuation.
Concentration might become a problem
The US equity market is beginning to become uncomfortable concentrated, with the top 10 companies now representing approximately 35% of the S&P 500's total weight. This marks the highest concentration level since the late 1970s, driven primarily by the Magnificent Seven technology giants. The combined market capitalization of these seven companies has reached nearly $16 trillion, equivalent to more than four times the entire Russell 2000 index of small cap.
The performance divergence between market-cap weighted and equal weighted indices tells a story. In 2024, the cap-weighted S&P 500 returned 24.7%, while its equal-weighted counterpart managed only 11.3%, creating a performance gap of 13.4 percentage points. This disparity represents one of the widest spreads on record, with the ratio of equal-weight to market-cap weighted S&P 500 performance dropping to 1.19 in early 2025, its lowest level since November 2008.
Palantir at 548x earnings: Investing or imagining?
Nowhere is the market's speculative fervor more evident than in Palantir Technologies (PLTR), which has become the poster child for valuation extremes. As of August 2025, the company trades at a staggering P/E ratio of 548.55 times and a P/S ratio of 143.64 times. To put this in perspective, the company's market capitalization of $435 billion exceeds that of many established technology giants despite generating quarterly revenues of just over $1 billion.
The stock has surged over 1,700% since its 2020 public debut, with retail investors injecting $1.2 billion into shares in a single month according to Goldman Sachs data. This astronomical rise has occurred despite the company's forward P/E ratio exceeding 280 times, compared to Apple and Microsoft's more modest 30 times multiples.
Exhibit 1
Is value investing alive, on hold or dead?
Warren Buffett's investment philosophy faces its greatest test in decades. After delivering a remarkable 5,502,284% return over 60 years (19.9% annually) compared to the S&P 500's 39,054% (10.4% annually), his value-oriented approach has increasingly been questioned by a new generation of investors chasing AI driven growth stocks.
However, reports of value investing's death have been greatly exaggerated. Buffett himself has evolved his strategy over the decades, moving from Benjamin Graham's strict "cigar butt" approach to investing in high quality businesses with sustainable competitive advantages at fair prices. His recent investments in 2025, including increased positions in Constellation Brands, Pool Corporation, and Domino's Pizza, demonstrate his continued commitment to value principles while adapting to modern market conditions. The Oracle of Omaha's approach has also embraced technology when it meets his criteria.
His investment in Apple, which began in 2016, now represents Berkshire Hathaway's largest holding. Buffett recognized Apple not as a technology company but as a consumer goods company with incredible brand loyalty and pricing power, proving that value principles can apply across sectors.
History provides valuable context for today's growth versus value debate. Since 1927, value stocks have outperformed growth stocks by an average of 4.4% annually. In years when value outperformed, the average premium was nearly 15%. This long-term outperformance has been remarkably consistent, with value beating growth in approximately three out of four decades since the 1930s.
The exceptions are the Great Depression of the 1930s, the technology bubble of the 1990s, and the interest rate bubble of the 2010s. Each period was characterized by unique circumstances that temporarily favored growth over value, but historical mean reversion eventually occurred. The period from 2007 to 2020 represented an anomaly, marking the longest value underperformance streak since World War II.
This 13-year stretch coincided with unprecedented monetary policy accommodation, where ultra-low interest rates made future growth more valuable relative to current earnings. The 2008-2009 financial crisis ushered in an era of secular stagnation, creating a world where growth was scarce and investors paid premium prices for companies that could deliver expansion earnings.
Exhibit 2
Signs of rotation
In early 2025 we saw the first meaningful signs of sector rotation in years. Value stocks outperformed growth in January 2025, led by financial services and healthcare stocks. Financial services stocks, representing 25.2% of the US Value Index, contributed 1.8 percentage points to the index's 4.5% rally, while healthcare stocks added 1.1 percentage points. This rotation reflects several underlying factors:
Interest Rate Dynamics: With central banks beginning to ease monetary policy but from higher levels than in the post 2008 era, the extreme valuation premiums for growth stocks are becoming harder to justify.
Earnings Reality: The Magnificent Seven's revenue growth of 15% year-over-year, while impressive, comes with significantly increased capital expenditures that have concerned investors. Meanwhile, the remaining 493 stocks in the S&P 500 show more modest but sustainable 2.9% revenue growth.
Valuation Compression: Growth stocks currently trade at elevated valuations relative to historical averages and compared to value stocks. The price-to-earnings ratio gap between growth and value has reached levels reminiscent of the late 1990s technology bubble.
Where value hides in plain sight
Modern value stocks have become more diversified across sectors. The Russell 1000 Value Index now allocates 16% to healthcare, 20% to financials, 15% to industrials, 13% to information technology, and 9% to consumer staples. This diversification contrasts sharply with the Russell 1000 Growth Index, which concentrates almost 40% in information technology.
The information technology weighting within value stocks might surprise many investors. This allocation is driven by industries such as hardware, semiconductors, IT services, and communications equipment, rather than the software companies that dominate growth indices. This sector diversification provides value strategies with better risk adjusted returns and reduces concentration risk.
Financial services stocks have shown particular strength in early 2025, with JPMorgan contributing 0.5 percentage points to the Value Index's performance following strong fourth-quarter earnings. The sector benefits from rising interest rates, improved net interest margins, and normalized credit conditions after years of ultra-low rates.
Exhibit 3
The mean reversion case
Several quantitative factors suggest value stocks are positioned for outperformance:
Valuation Spreads: Value stocks trade at their cheapest levels relative to growth stocks since the 1990s technology bubble. This extreme discount creates a compelling risk-reward proposition for contrarian investors.
Economic Conditions: Recent data suggests global industrial activity will gain momentum in 2025, potentially ending the manufacturing recession. This economic backdrop typically favors value oriented sectors such as industrials, materials, and energy.
Policy Support: Geopolitical tensions and supply chain concerns are driving increased infrastructure and defense spending, benefiting traditionally value-oriented sectors.
Despite the compelling case for value, several risk factors warrant consideration:
Technological Disruption: The AI revolution continues to create winner-take-all dynamics in certain industries, potentially justifying premium valuations for market leaders.
Monetary Policy Uncertainty: Central bank policy remains fluid, and any return to ultra accommodative conditions could reignite growth stock outperformance.
Market Structure: The rise of passive investing and algorithmic trading may perpetuate momentum effects, extending growth stock leadership beyond fundamental justification
The paradox resolved
The current market environment embodies a classic paradox: extreme valuations coexist with extraordinary investment opportunities. While Palantir and similar high flying growth stocks capture headlines with astronomical valuations, patient value investors can find compelling opportunities in overlooked segments of the market.
Warren Buffett's wisdom remains relevant precisely because markets occasionally lose sight of fundamental principles. His 60-year track record demonstrates that buying quality businesses at reasonable prices generates superior long-term returns. The current environment, with its extreme concentration and stretched valuations, may prove to be one of those moments when patient capital is rewarded.
History suggests that markets eventually correct excessive valuations, often more rapidly and severely than bulls anticipate. The mathematical impossibility of sustaining extreme growth rates indefinitely, combined with historical precedents and current valuation spreads, creates a compelling case for at least partial portfolio rotation toward value strategies. The Oracle of Omaha's playbook isn't obsolete, it's simply waiting for its next great performance. As he famously noted, "Be fearful when others are greedy and greedy when others are fearful."
With AI mania reaching fever pitch and value stocks trading at historically cheap levels compared to growth, perhaps it's time to dust off that old copy of Security Analysis after all. The question isn't whether Warren Buffett's approach is outdated, it's whether investors have the patience and discipline to apply his time-tested principles in a time of instant gratification. History suggests that those who do will be handsomely rewarded when the inevitable rotation occurs. As you might observe, I don't think the music at University of Berkshire Hathaway has stopped, it's just paused for dramatic effects amid today's tech frenzy.
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