Large-cap concentration reaches a record level
Miller Value said in its third-quarter 2026 commentary that the US market had narrowed further as geopolitical tensions, inflation and interest-rate uncertainty increased. Capital continued to flow toward the largest companies by market value. The conflict in Ukraine and the war in Iran pushed energy prices higher, while government bond yields rose across maturities, adding to concerns that inflation and interest rates could remain elevated.
At the end of the quarter, the 30 largest US companies represented 50% of the total US equity market capitalization. That was roughly one-third above the average level recorded from 1989 through 2022 and 1,000 basis points above the peak reached during the 2000-01 dot-com bubble. Ten of the 11 largest companies in the top 30 were leaders in artificial intelligence. Since 2023, AI-related companies have doubled their weight in the S&P 500 to 41%.
Valuations for these companies have also expanded materially. The top 30 US companies traded at an aggregate price-to-sales ratio close to 7 times, above the roughly 5-times peaks reached in 2000 and 2021. The AI and technology companies within the group averaged a price-to-sales ratio of more than 15 times.
Miller Value said the valuations of longer-duration stocks reflected high expectations for growth many years into the future. The concentration also creates greater correlation risk for passive index investors. If crowded, highly valued shares correct, the apparent diversification of major indexes may not fully offset portfolio volatility.
AI spending cycle shows early signs of change
In recent years, private-equity backing, an active IPO market, revolving financing relationships and bond markets willing to lend at only modest spreads over risk-free rates helped fund large-scale AI investment. The financing backdrop has now begun to shift. The IPO market is less accommodating than before, while some AI-related bonds have fallen in price after issuance, pushing their yields higher.
During the later stages of a major capital-spending cycle, investors typically pay closer attention to overinvestment and balance-sheet risk. If companies fail to meet the high growth expectations embedded in their valuations, or if leverage becomes excessive, refinancing pressure can rise quickly.
Miller Value said the market could eventually shift from companies continuing to spend heavily to build AI capacity toward businesses that capture productivity gains from AI and convert them into earnings and cash flow. The timing and scale of that shift will depend on financing costs, operating performance and changes in investor risk appetite.
Small caps face an unusually wide valuation gap
Although concentration in large-cap stocks has kept the US market near historical highs, many companies are trading well below their year-to-date peaks. Their earnings yields and free-cash-flow yields have reached double digits, in some cases exceeding twice the prevailing risk-free rate.
In the third quarter, small caps underperformed large caps by 880 basis points, their third-worst relative result in nearly 50 years. The five largest companies in the S&P 500 reached a record combined market value of roughly six times the value of every company in the Russell 2000. Their price-to-sales ratio was close to five times that of the small-cap index as a whole.
Miller Value said small-cap underperformance is often attributed to rising interest rates, but historical data does not fully support that explanation. Strategas Research Partners reviewed market performance after the first rate hike in cycles from 1975 to 2022 and found that the Russell 2000 outperformed the S&P 500 after 20, 65, 125 and 250 days. Small caps also produced positive returns over each of those periods.
Historical style cycles between large and small companies have typically lasted 10 to 14 years. Key drivers include market concentration, relative valuations, earnings growth and rolling 10-year returns. In the third quarter of 2026, small-cap earnings growth exceeded that of larger companies. Miller Value expects the trend could continue if economic growth remains resilient and the regulatory environment continues to ease.
The gap between the rolling 10-year performance of large and small caps has returned to the first percentile, placing it near an extreme reached only rarely over the past century.
Deep Value Select gains 5.45% in the third quarter
The Deep Value Select strategy generated a 5.45% net return in the third quarter, outperforming the 0.31% return of the S&P 1500 Value Index and the negative 5.88% return of the S&P 600 Value Index. For the year to date through the end of the quarter, the strategy had returned 20.93% net, compared with 8.97% for the S&P 1500 Value Index and 13.82% for the S&P 600 Value Index.
Fossil Group and Gray Media made the largest positive contributions during the quarter. Fossil Group rose 58.7% as new management continued to execute its turnaround plan. New products helped reverse a decline in the traditional watch business that had lasted for more than a decade. As additional products reach the market and store closures pass their one-year anniversaries, the strategy manager expects the company’s overall revenue to return to growth. A weaker consumer remains a risk, but a successful turnaround could allow Fossil Group to generate more than $100 million in normalized free cash flow.
Gray Media rose 13.4%. The company could benefit from the Federal Communications Commission’s removal of ownership caps. A recently completed bolt-on acquisition added 10 duopoly markets, potentially creating synergies and strengthening the balance sheet. Industry surveys indicate that political advertising could approach its record 2024 level over the medium term. Gray Media owns the No. 1 or No. 2 television station in many closely contested political markets.
An advertising downturn could still weigh on results. Miller Value said Gray Media’s free cash flow over the next six quarters could exceed its current market capitalization, while ongoing debt repayment would also affect the value attributable to shareholders.
USA Today and Nabors weigh on returns
USA Today and Nabors Industries were the largest negative contributors in the third quarter. USA Today fell 26.4%, while Nabors Industries declined 7.0%.
Miller Value said USA Today’s transformation was not progressing in a straight line, but that the current plan remained in execution. Its diversified digital businesses and new AI partnerships could eventually account for more than half of total revenue. The company averages 186 million monthly unique visitors, providing a base for developing additional digital revenue streams.
The commentary compared USA Today with The New York Times, which completed a similar transformation a decade ago. At that time, The New York Times’ price-to-sales ratio expanded from less than 0.5 times to 3.2 times, while its enterprise-value-to-EBITDA multiple rose from 7 times to 21 times.
USA Today’s antitrust lawsuit against Google is still awaiting trial. The case has similarities to recent Google antitrust victories by the US Department of Justice and state attorneys general. USA Today is seeking more than $900 million in damages. If the antitrust case succeeds, the relevant legal framework could permit treble damages. The outcome, timing of the trial and amount ultimately recovered remain uncertain.
Nabors Industries could benefit from the recent rise in oil prices. Historically, higher oil prices have supported the deployment of high-specification drilling rigs and improved follow-on pricing for existing drilling contracts. Nabors Drilling Solutions, the company’s technology business, could expand its use on company-owned and third-party rigs over the next year.
Miller Value also said the market could be underestimating the long-term cash-flow potential of Nabors’ joint venture with Saudi Aramco, as well as the company’s investments in thermal energy. A global economic surprise that led to a recession could still push oil prices back toward $50 a barrel, while supply disruptions linked to the two wars could continue supporting energy prices in the coming months.
Miller Value estimates that Nabors is valued at less than twice cash flow, with an enterprise-value-to-EBITDA multiple of close to 3 times for 2027.
Concentrix added to the portfolio
Deep Value Select established a new position in Concentrix during the third quarter. The company provides strategy and design, data and analytics, enterprise technology and digital operations services to large global consumer businesses. Its customers include 160 companies in the Fortune Global 500, while its 25 largest customers have maintained relationships with the company for an average of 16 years.
Concentrix shares have fallen nearly 90% from a peak above $200. Recent revenue has been affected by two developments: a smaller, shrinking portion of the call-center business has moved to lower-cost regions, and several customers have reduced services previously provided by Concentrix. The commentary expects revenue pressure to peak in the current quarter and ease over the following year.
The company has close to $10 billion in revenue and assets, relatively low capital intensity and expected annual free cash flow of more than $600 million. That implies a free-cash-flow yield of more than 40%. Concentrix has also developed its own AI solutions platform, holds more than 300 patents and has received multiple industry and customer awards.
As higher-margin AI services expand, the company’s revenue growth and profitability could change. More than 90% of its revenue comes from outside the United States, however, leaving it more exposed to geopolitical conditions. Its current price-to-earnings and price-to-cash-flow multiples are close to 2 times, well below those of comparable companies. Future performance will depend on a recovery in revenue, lower debt and a narrowing of the valuation gap.
Eight years of Deep Value Select
Deep Value Select recently reached its eighth anniversary. Since inception, it has generated a cumulative net return of 408.3%, equivalent to an annualized net return of 22.5%. The strategy no longer holds some of the assets that generated 80% of its historical performance and has reallocated capital to new holdings or existing holdings that have recently lagged the strategy’s returns.
The strategy is concentrated in companies requiring several years to complete a turnaround, businesses recovering from losses and cyclical stocks trading at depressed valuations. These companies generally face low market expectations and temporarily weakened market values, but retain several long-term factors that could unlock equity value.
Miller Value also noted that small- and micro-cap exposure, liquidity constraints, industry cycles and failed company turnarounds can produce greater volatility and longer periods of underperformance. Valuation discounts may persist or widen. The portfolio discussion describes the investment process and market views and does not constitute a recommendation to buy, sell or hold any security.