Over the past year, US stocks have delivered strong returns, but much of the gains have come from a select few tech giants. The ‘Magnificent Seven’ – Apple, Microsoft, Amazon, Alphabet, Nvidia, Meta, and Tesla – have been the driving force, fuelled by the AI boom. However, cracks are starting to show. First, the emergence of Chinese AI company, DeepSeek, made investors question the potential dominance of the Magnificent Seven and the huge capital expenditure budgets these companies have been pouring into AI development. Recent earnings reports have highlighted slowing growth and stretched valuations for some of these mega-caps, raising questions about whether their dominance is sustainable.
At the same time, the first few weeks of Trump’s Presidency have created economic uncertainty. The wave of executive orders and changing trade agreements, including a new 10% baseline import tax and custom tariffs of up to 54%, are raising concerns over future growth prospects and the risk of inflation.
Diversifying exposure
The S&P 500’s growing dependence on the performance of just a few AI-fuelled mega-caps feels a lot like the late 1990s, when the tech, media, and telecom (TMT) bubble created a similarly unbalanced landscape. Back then, a few large cap stocks were responsible for most of the market gains – until the TMT bubble burst.
Due to these valuation concerns, Copia has been cautious on the US for some time. However, given that the S&P 500 represents roughly 65–70% of the global equity market, its sheer size means that the Index can’t be ignored. To tackle concentration risk, while continuing to capture the potential of the broader US market, we’ve focused on diversification strategies that reduce dependence on the Magnificent Seven.
One way of doing this is to invest in passive equal-weight indices. Unlike the traditional S&P 500, which is weighted by market cap, equal-weight indices spread exposure more evenly. This reduces the dominance of mega-cap stocks, giving smaller names more influence and results in a broader diversification, with less reliance on a small number of tech giants to drive returns.
The US outlook
Looking ahead, expectations for the US market largely hinge on the success of Trump’s policies in stimulating domestic productivity and economic growth. If effective, there’s potential for smaller companies in particular to do well. After the TMT bubble burst in the late 1990s, small companies offered big opportunities. The current administration’s focus on deregulation and tax cuts could improve the business landscape for small caps, while tariffs should have less impact on more domestically focused companies.
However, not everyone is convinced that the policy measures being taken will produce the intended results. Some analysts fear they will weaken the economy and may even lead to a recession in the next 12 months. This uncertainty is unsettling markets and increasing volatility.
It seems likely that the US market will face continued challenges, but this will, in turn, create opportunities. While we wait for the current political turmoil to play out, balancing Copia’s portfolio with equal-weighted indices will help provide more diversified and resilient exposure to US equities.
My colleagues, Tony Hicks and Richard Warne, will be talking extensively about the US markets in our next Quarterly Market Review on Tuesday 15 April 2025. You can register now to join them for the online webinar.
This article, and our upcoming webinar, are intended for regulated financial advisers and investment professionals only. Copia does not provide financial advice. This information is not intended as financial advice and should not be interpreted as such.
3rd April 2025
What’s next for US equities?
Over the past year, US stocks have delivered strong returns, but much of the gains have come from a select few tech giants. The ‘Magnificent Seven’ – Apple, Microsoft, Amazon, Alphabet, Nvidia, Meta, and Tesla – have been the driving force, fuelled by the AI boom. However, cracks are starting to show. First, the emergence of Chinese AI company, DeepSeek, made investors question the potential dominance of the Magnificent Seven and the huge capital expenditure budgets these companies have been pouring into AI development. Recent earnings reports have highlighted slowing growth and stretched valuations for some of these mega-caps, raising questions about whether their dominance is sustainable.
At the same time, the first few weeks of Trump’s Presidency have created economic uncertainty. The wave of executive orders and changing trade agreements, including a new 10% baseline import tax and custom tariffs of up to 54%, are raising concerns over future growth prospects and the risk of inflation.
Diversifying exposure
The S&P 500’s growing dependence on the performance of just a few AI-fuelled mega-caps feels a lot like the late 1990s, when the tech, media, and telecom (TMT) bubble created a similarly unbalanced landscape. Back then, a few large cap stocks were responsible for most of the market gains – until the TMT bubble burst.
Due to these valuation concerns, Copia has been cautious on the US for some time. However, given that the S&P 500 represents roughly 65–70% of the global equity market, its sheer size means that the Index can’t be ignored. To tackle concentration risk, while continuing to capture the potential of the broader US market, we’ve focused on diversification strategies that reduce dependence on the Magnificent Seven.
One way of doing this is to invest in passive equal-weight indices. Unlike the traditional S&P 500, which is weighted by market cap, equal-weight indices spread exposure more evenly. This reduces the dominance of mega-cap stocks, giving smaller names more influence and results in a broader diversification, with less reliance on a small number of tech giants to drive returns.
The US outlook
Looking ahead, expectations for the US market largely hinge on the success of Trump’s policies in stimulating domestic productivity and economic growth. If effective, there’s potential for smaller companies in particular to do well. After the TMT bubble burst in the late 1990s, small companies offered big opportunities. The current administration’s focus on deregulation and tax cuts could improve the business landscape for small caps, while tariffs should have less impact on more domestically focused companies.
However, not everyone is convinced that the policy measures being taken will produce the intended results. Some analysts fear they will weaken the economy and may even lead to a recession in the next 12 months. This uncertainty is unsettling markets and increasing volatility.
It seems likely that the US market will face continued challenges, but this will, in turn, create opportunities. While we wait for the current political turmoil to play out, balancing Copia’s portfolio with equal-weighted indices will help provide more diversified and resilient exposure to US equities.
My colleagues, Tony Hicks and Richard Warne, will be talking extensively about the US markets in our next Quarterly Market Review on Tuesday 15 April 2025. You can register now to join them for the online webinar.
This article, and our upcoming webinar, are intended for regulated financial advisers and investment professionals only. Copia does not provide financial advice. This information is not intended as financial advice and should not be interpreted as such.