A new set of winners: Actively navigating a broadening market
With U.S. equity leadership broadening beyond mega-cap stocks, active management offers a path to uncover tomorrow’s winners while managing passive investment concentration risks.
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5 minute read
Key takeaways:
- The equity market’s recent dominance by a handful of mega-cap stocks has raised questions about concentration risks and overlooked opportunities.
- The combination of broadening earnings growth, reasonable valuations outside of the Mag 7, and the potential for AI technology disruption suggests a new set of market leaders may be on the horizon.
- In the shifting market landscape, actively managed strategies that leverage fundamental research could play an increasingly valuable role in portfolio construction, helping manage risks and uncover companies building sustainable competitive advantages.
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.
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1 Magnificent 7 includes Apple, Microsoft, Amazon, NVIDIA, Alphabet, Tesla and Meta.
2 Source: JHI as of 28 February 2025.
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5 minute read
Key takeaways:
- The equity market’s recent dominance by a handful of mega-cap stocks has raised questions about concentration risks and overlooked opportunities.
- The combination of broadening earnings growth, reasonable valuations outside of the Mag 7, and the potential for AI technology disruption suggests a new set of market leaders may be on the horizon.
- In the shifting market landscape, actively managed strategies that leverage fundamental research could play an increasingly valuable role in portfolio construction, helping manage risks and uncover companies building sustainable competitive advantages.