A Reminder Why Stock Diversification is So Important
In 2024, fewer than 30% of companies in the S&P 500 outperformed the overall index, which hasn't happened since rare periods like 1998–1999, 1980, and 1973(i). We also know that the stock market still managed to perform well last year, thanks to a handful of major technology companies essentially pulling the indices higher.
Stories of “overconcentration” in the markets were everywhere, and for good reason. By the end of last year, the 10 largest companies in the S&P 500 made up almost 40% of the entire index. The previous peak for this level of concentration was 29%, last reached in the late 1990s(ii).
Many investors were wondering how long mega-cap technology companies would outperform. But the right question to ask, in my view, was: what tends to happen to stock market performance after periods of extreme market concentration?
The answer, using history as a guide, is that ‘narrow’ performance periods tend to be followed by broader market participation as economic conditions shift, and as the business cycle matures. I’ve been around long enough to see this type of rotation happen many times. A category of stocks dominates for a long time and its leadership seems impenetrable, but then all of a sudden it becomes a lagging or middling sector or region.
2025 appears to be another case study in what these rotations can look like.
Through May 30, the S&P 500 is down about -0.50% for the year, while foreign stocks (MSCI World ex-US) are up roughly +16%. I could detail a few reasons why I think this is happening—global central banks are lowering interest rates, Europe is implementing big fiscal stimulus programs, developed countries for the first time in years have more economic policy certainty than the U.S. Or as seen below, U.S. stocks had simply been pricier than foreign counterparts for years running:
But I think all the fundamental or technical insights about this performance divergence are less important than recognizing the investment principle at work. And in my view, it is this: leadership was bound to change hands at some point. No one sector, industry, region, or country consistently outperforms.
The current rotation is also showing up across styles and sectors. As of May 30, value stocks are up 1.62% while growth stocks are down -2.5%(1), which runs counter to what we’ve seen in previous years. And as you can see in the table below, sector leadership has changed from the first half of 2024 compared to year-to-date 2025:
The Utilities sector has maintained its position near the top of the leaderboard, likely tied to rising power demand associated with training artificial intelligence. But historically, Utilities has been a defensive sector and tends to lag during economic expansions. Again, a sector’s relative performance often changes from year to year.
Which brings me to the core point I want to drive home. In RSMA’s view, prudent investing means being positioned for—not reacting to—changes in market leadership. The narrow market concentration we saw in 2023 and 2024 showed major signs of unwinding in 2025, and our diversified approach allowed us to participate in the leadership change. We have international exposure, value exposure, and Industrials exposure because we’ve built diversified portfolios for clients.
Headlines will almost certainly continue to focus on volatility and uncertainty—from trade disputes to questions about the trajectory of U.S. growth. But history consistently demonstrates that economic seasons change, and with them, so does market leadership. We think maintaining a broadly diversified portfolio across sectors, styles, regions, and asset classes gives us the best chance to navigate these transitions successfully.
(i) Source: “Do the Markets Have a Concentration Problem,” January 10, 2025, Northwestern Mutual.
(ii) Source: “Do the Markets Have a Concentration Problem,” January 10, 2025, Northwestern Mutual.
(iii) See Index Disclaimers
(1) As measured by the Russell 1000 Value Index (for value stocks) and the Russell 1000 Growth Index (for growth stocks)
____________
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All indices are unmanaged and may not be invested into directly. Past performance is no guarantee of future results.
Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Forward P/E ratio (forward price-to-earnings ratio): A valuation metric that compares a stock's current share price to its forecasted earnings per share for the next 12 months or fiscal year.
The MSCI All Country World Index ex US (ACWI ex US) measures the performance of large and mid-cap companies across 22 developed markets and 24 emerging markets, excluding the United States. It covers approximately 85% of the global equity opportunity set outside the US.
All illustrations are hypothetical examples and are not representative of any specific situation. Your results will vary.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
The S&P 500 is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance.
The Russell 1000® Value Index measures the performance of the large cap value segment of the US equity universe.
The Russell 1000® Growth Index measures the performance of the large cap growth segment of the US equity universe.
The MSCI Japan Index is designed to measure the performance of the large and mid cap segments of the Japanese market. The index covers approximately 85% of the free float-adjusted market capitalization in Japan.
The MSCI USA Index is designed to measure the performance of the large and mid-cap segments of the US market. With 576 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the US.
The MSCI AC Asia ex-Japan Index captures large and mid-cap representation across 2 of 3 Developed Markets (DM) countries* (excluding Japan) and 8 Emerging Markets (EM) countries* in Asia. With 1,020 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
The MSCI Europe Index captures large and mid-cap representation across 15 Developed Markets (DM) countries in Europe*. With 399 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe.
