Weekly Buzz: Think you're diversified? 📊

5 minute read

The S&P 500’s top ten companies now make up nearly 40% of the entire index. In other words, if you’re invested in the US at all, your portfolio might be riding on the fortunes of just a few companies – which makes it worth thinking about how to spread that risk.

What’s going on here?

When markets get this top-heavy, you’d expect investors to tread cautiously. After all, if just a handful of stocks are driving the bulk of returns, a stumble from any one of them could drag the whole market down. Instead, we’re seeing the opposite: capital has continued to flow into the same mega-cap names, even as concentration risk grows.

Going global helps, but not as much as you might think. International benchmarks have only grown more US-centric over time: American stocks now represent about two-thirds of the MSCI All-Country World Index, up from one-third in the 1980s. 

To be clear, this isn’t a flaw in how markets work. When Apple, Microsoft, or any of their Magnificent Seven peers add billions in market value, their weight in market-cap indices naturally increases. The issue isn't owning quality companies, it's building a portfolio that doesn't rely too heavily on any one asset.

What does this mean for you?

Owning hundreds of stocks won’t help much if they all move in the same direction. To truly manage risk, diversification needs to go beyond equities – across asset classes that react differently to economic shifts. That includes bonds, gold, commodities, and even the currencies they’re denominated in.

Different asset classes don’t always rise and fall together, and that’s the point. Diversification isn’t about adding more names – it’s about reducing your exposure to the same risks. In a market increasingly driven by the same few names, that kind of balance matters more than ever.

(Looking for this kind of cross-asset diversification? Check out General Investing.)

This article was written in collaboration with Finimize.

💡 Investor’s Corner: Healthcare might be on the mend

Healthcare has been the market's wallflower lately, underperforming the S&P 500 since late 2023. The sector now trades at 16 times forward earnings compared to the S&P 500's 22 times – its steepest discount since the 1990s.

Besides a post-COVID dip, a big reason for this cold shoulder has been the economy's resilience. That’s kept investors focused on growth sectors rather than defensive ones like healthcare. When valuations reset like this while the fundamentals remain intact, however, investors take notice – Warren Buffett recently revealed a significant stake in UnitedHealth, the US's largest health insurance provider.

The fundamental drivers for the sector haven't disappeared. Aging populations across developed markets continue driving healthcare demand, while chronic disease rates have climbed higher. Innovation is accelerating rather than slowing – breakthrough treatments for diabetes have boosted pharmaceutical pipelines, while the use of AI is compressing drug discovery timelines. This combination of defensiveness and innovation potential offers diversification precisely when the market is looking a bit concentrated.

(For an in-depth read on healthcare, biotech, and pharmaceuticals, see our CIO Insights: A pulse check on the healthcare sector. If you’re looking to gain exposure, check out our Healthcare Innovation portfolio.)

📖 A Little Context: The Nifty Fifty

Today's Magnificent Seven aren't the first stocks to dominate headlines. In the late 1960s and early '70s, investors crowned the "Nifty Fifty": giants like Coca-Cola, Polaroid, IBM, McDonald's, and Disney that were considered so reliable you could "buy and never sell."

Like today’s leaders, these companies commanded premium valuations in their time. Their outcomes, however, diverged: some, like Polaroid, faded into obscurity as technology moved on, while others, like McDonald’s and Johnson & Johnson, continued to compound for decades.