The U.S. equity market has been dominated by a handful of mega-cap stocks in recent years, with the so-called “Magnificent 7” (Mag 7)¹ driving the lion’s share of returns. However, signs of a market rotation and a shift in underlying earnings fundamentals suggests a potential broadening of market leadership, underscoring the importance of identifying tomorrow’s winners through active management.

Concentration presents challenges
Top-heavy market leadership has been the dominant narrative in U.S. equities since 2023. Understandably, investors gravitated toward stocks with durable, strong earnings during a period of more restrictive monetary policy and greater economic uncertainty. Tech giants, in particular, capitalized on momentum in artificial intelligence (AI), cloud computing, and cutting-edge hardware and software.

However, in bidding up the Mag 7, pure passive investors may have overlooked concentration risk in their portfolios. The level of concentration in the S&P 500^® Index has reached historic proportions, with Mag 7 companies accounting for an outsized 31% of the index. In the Russell 1000 Growth Index, it is even higher at 55%.² This leaves investors heavily exposed to a narrow set of risks, including geopolitical risks (e.g., exposure to China/Taiwan), thematic risks (e.g., AI adoption and return on investment), and the potential for sudden shocks to specific sectors or stocks.

Moreover, the tech-centric business models of the top companies mean that other market segments – such as healthcare, industrials, and consumer staples – are underrepresented in passively managed, cap-weighted portfolios. The lack of diversification not only diminishes return drivers from these sectors but also increases vulnerability to significant downturns if the dominant stocks falter.

¹ Magnificent 7 includes Apple, Microsoft, Amazon, NVIDIA, Alphabet, Tesla and Meta.
² Source: JHI as of 28 February 2025.