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On December 08, 2025
AAM Viewpoints - Beyond the Magnificent Seven: A Case for Value in a Concentrated Market
The dominance of the Magnificent Seven stocks has pushed the S&P 500 to historic levels of concentration. As a result, the top 10 stocks now comprise 41% of the index's total market capitalization.1
This reliance on a few giants makes the broader index vulnerable to idiosyncratic risks, stretched valuations, and concerns that investors may be chasing a bubble. This article makes the case for why we believe value stocks and equally weighted structures are well positioned in the coming years by examining divergent fundamentals, recognizing potential opportunities in dividends, and capitalizing on potential rotation toward defensive sectors.
Long-Term Trends
Historical averages suggest that market leadership within Value and Growth segments change roughly every 5.3 years. However, Large-Cap Growth stocks have experienced an extended period of dominance, outperforming approximately 85.5% over the last 20 years.2 This prolonged cycle has driven a significant increase in the valuation gap between growth and value companies. In fact, the S&P 500 Growth index currently trades at a trailing 12-month price-to-earnings (P/E) ratio of 32.52, significantly higher than the S&P 500 Value index, which trades at a P/E of 20.21. In other words, the S&P 500 Growth Index is trading at a 61% premium compared to its value counterpart. This creates an intriguing dynamic where the momentum of recent trends is challenged by historical precedent and valuation fundamentals.
Past performance is not indicative of future results.
Dividend Opportunities
The S&P Value Index offers a distinct income advantage over its broad market counterpart, currently providing a dividend yield that is approximately 85% higher than that of the standard S&P 500 index. This yield differential is a significant characteristic, particularly when evaluating risk-adjusted performance. Analysis of stock performance based on dividend yield quartiles over the past five years reveals that the highest-yielding stocks delivered the second highest total return, a strong performance that nearly matched the top performers.3 The most critical takeaway is regarding risk mitigation as these high-yielding stocks experienced a significantly smaller maximum drawdown compared to the lowest-yielding stocks, confirming that the consistent cash flow from dividends have the potential to provide a protective cushion during periods of market distress and downturns. This highlights the potential for a compelling risk/reward profile for income-focused strategies, combining solid returns with enhanced defensive characteristics.
Source: S&P Global | Past performance is not indicative of future results.
Sector Rotation — Defensive
Value stocks tend to have a higher weighting in traditionally defensive sectors like Health Care, Consumer Staples, and Utilities, while the S&P Growth index is more heavily allocated to Technology and Consumer Discretionary sectors, further contributing to the Value index's resilience in volatile markets.
According to forecasts, U.S. GDP growth for 2026 is expected to decrease to 2.5% from 2.9% in the previous year, while the Consumer Price Index is projected to slightly decrease to 2.6% from 2.9% but remain above the Federal Reserve's 2% target rate. Defensive stocks are well positioned in 2026 due to expectations of slowing economic growth and persistent, above-target inflation, which can lead investors to favor the stability of companies in sectors like Consumer Staples, Utilities, and Healthcare.
Balanced Approach
Diversification is a key strategy for navigating market volatility and economic uncertainty. By spreading investments across different assets, sectors, and styles, such as an equal-weighted approach versus a traditional market-capitalization weighted approach, investors can mitigate risk. Historically, the equal-weighted S&P 500 has delivered superior long-term performance over a 30-year timeframe and greater resilience across various market cycles compared to its cap-weighted counterpart.4
In conclusion, the current high concentration of assets within a handful of mega-cap stocks presents significant risks to diversified portfolios, suggesting that historical long-term trends may eventually prompt a market rotation back toward a value-oriented approach. Amidst ongoing uncertainty and volatility, investors can employ several strategic measures: dividends can provide a tangible source of return and can act as a buffer during downturns, while sector rotation into defensive areas like Health Care and Consumer Staples offers a haven. Structuring a portfolio using an equal-weight approach further mitigates single-stock risk and, as history shows, provides a robust framework for capturing broader market performance over the long run, positioning investors more resiliently for future market cycles, in our opinion.
Sources:
This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.
CRN: 2025-1208-13064 R
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