2025 Multi-Asset Strategies Outlook

Market Concentration, “Bad Breadth” and the Case for Small-Caps

As we head into the last quarter of the year, here are a few things we’re thinking about: market breadth, small-cap stocks, the U.S. debt load and the dollar.

Bad Breadth?

It seems like the Magnificent Seven (Mag 7) stocks are regularly in the news for hitting new highs. Meanwhile, the Information Technology sector, which includes only three Mag 7 firms, has been capturing an ever-larger share of the S&P 500^® Index’s total market value.

Technology stocks, combined with the four non-tech Mag 7, now capture over 45% of the S&P 500 Index. Meanwhile, the index represents about 80% of the total U.S. stock market.

This means the “tech plus 4” returns drive overall market returns and the price-earnings multiple, even though the number of stocks involved is only 14% to 15% of the S&P 500. This heavy concentration, or lack of market breadth — also known as “bad breadth” — is concerning.

As the S&P 500 climbs higher, fewer individual stocks are participating. This creates a feedback loop where momentum in a small portion of market-cap-weighted indexes causes these stocks to attract a larger share of capital flowing into passive index funds, which in turn drives even more momentum. We believe this situation is becoming increasingly precarious.

When we contrast the market-cap-weighted S&P 500 with a version of the S&P 500 that gives equal weight to each stock in the index, we see how the extreme concentration in the market has been distorting broader returns. But it hasn’t always been this way.

Looking at rolling five-year total returns over 30 years, the equally weighted version of the index outperformed the market cap-weighted index nearly 60% of the time, as shown in Figure 1. In other words, the market has historically had better breadth.

We’re not saying the recent trend of concentrated performance will reverse soon, but it doesn’t look sustainable.

Figure 1 | The Equally-Weighted S&P 500 Outperformed Half the Time

Rolling 5-Year Return Differences: Equally-Weighted S&P 500 Index minus Capitalization-Weighted S&P 500 Index

^{Data from 1/1/1994 – 12/31/2024. Source: FactSet. The chart shows the difference between the rolling 5-year returns of the equally-weighted S&P 500 Index and the capitalization-weighted S&P 500 Index. Bars above the 0% line indicate the equal-weighted index outperformed. Bars below the 0% line indicate the capitalization-weighted index outperformed. Past performance is no guarantee of future results.}

The Outlook for Small-Cap Stocks

As previously noted, the S&P 500 captures roughly 80% of the total value of the U.S. stock market. The other 20% consists of small-cap (and micro-cap) stocks.

With large-cap tech stocks grabbing all the headlines, it may not be surprising that small-cap stocks have significantly underperformed large-cap stocks for the past couple of years. We think there’s an argument to be made that small-caps may receive more attention in the future.

First, M&A activity might increase. Deal flow has been slow mainly because uncertainty from constantly changing tariff policies has caused CEOs to delay major investment decisions.

Although clarity on tariffs remains unclear, the One Big Beautiful Bill cuts corporate taxes by speeding up depreciation, freeing up more cash that could boost deal flow. This might offset some tariff-related worries, which could be positive for small-cap stocks targeted for M&A deals.

Second, Federal Reserve rate cuts should help revive private equity buyouts that rely heavily on borrowed funds. Given the historically appealing valuations of many of these companies, small-caps could become attractive targets for these buyouts.

The U.S. Debt and the U.S. Dollar

The U.S. debt and budget deficit are alarmingly high ($37 trillion and counting), and we don’t believe we can continue on this course indefinitely without something going awry. This could be higher interest rates, downgrades to the U.S. credit rating, a weaker currency, or likely all three.

When? We don’t believe there’s a single tipping point, and we don’t expect investors to flee from U.S. Treasuries en masse. However, we’re concerned about the combined impacts of the debt and deficit, the declining dollar, inflation and yields on long-term Treasuries that show investors are demanding a premium for lending to the U.S. for a decade or longer.

We have already seen all of this in 2025, and all could worsen unless the Trump administration shifts course (which seems unlikely).

If the increasing supply of Treasuries, which are issued to cover the deficit, experiences reduced demand, their prices would likely decline.

However, we don’t anticipate an acute crisis. Even if a major foreign holder of Treasuries suddenly began selling, this wouldn’t necessarily cause others to follow suit. Foreigners currently hold approximately 24% of all U.S. debt, with Japan and the U.K. being the largest holders.¹

If the Trump administration continues to provide stimulus through government spending or tax cuts in the face of a growing deficit, so-called “bond vigilantes” could begin to sell U.S. Treasuries in protest.

However, no secret cabal coordinates such actions. Given the risk of holding U.S. debt, it would simply reflect investor demand for more yield.

For foreign investors, the appeal of holding U.S. Treasuries is linked to the strength of the U.S. dollar, which partly depends on the “exorbitant privilege” of being the world’s reserve currency. This privilege allows the U.S. to borrow at low interest rates to finance its debt but relies on global demand for U.S. dollars.

Others would love to elevate their currencies to the same status the U.S. dollar enjoys and are now touting their reliability amid growing uncertainty about U.S. trade and tariff policies. Some have expressed concerns that confidence in the U.S. as a trading partner and a place to do business is weakening.²

In summary, while tariffs may help reduce trade deficits, they can also lead to higher prices and fewer choices for U.S. consumers. Additionally, they might result in a weaker dollar and higher Treasury yields, which could increase the cost of servicing the U.S. national debt.

There’s a lesser-known economic principle called "Ferguson’s Law," which suggests that any great power that spends more on servicing its debt than on its defense risks losing its status as a great power. In 2024, the U.S. began to violate Ferguson’s Law for the first time in nearly a century.

Richard Weiss

Chief Investment Officer

Multi-Asset Strategies

^{¹U.S. Department of the Treasury, Treasury International Capital System, as of June 30, 2025.
²Economic Times, “'Economic Nuclear Winter': Bill Ackman Says Business Leaders Losing Faith in Trump as Tariffs Rattle Markets,” April 6, 2025.}