A small duplicate of the Charging Bull statue is seen on a avenue vendor stall outdoors the New York Stock Exchange on July 11, 2025.
Jeenah Moon | Reuters
The S&P 500 index has bounced again from its April lows.
Yet experts say investors can be smart to watch the dangers earlier than pursuing an funding technique concentrated within the large-cap company-focused S&P 500 index, which represents about 80% of market capitalization.
“Our advice for people who are looking at their performance on a one-year or three-year horizon is no, we don’t think that the set-it-and-forget-it, S&P 500-only strategy is the right strategy,” stated Lisa Shalett, chief funding officer at Morgan Stanley Wealth Management.
Yet that does not imply the long-run index investing technique famously touted by Berkshire Hathaway Chairman Warren Buffett or Vanguard founder Jack Bogle is now not a superb technique, in accordance to Shalett.
Those investors may put the S&P 500 of their 401(okay) and never take a look at it for 30 years.
The drawback is that almost all people are extremely delicate to losses and test their accounts regularly, which makes it tough not to contact their investments for many years, she stated.
“That’s not how most human beings actually invest,” Shalett stated.
‘You’re shopping for tech and AI’
Having an funding technique concentrated within the S&P 500 index can also be problematic now for one more motive.
The S&P 500 had a superb second quarter, the place income and margins in mixture expanded, Shalett stated.
But the Magnificent Seven — expertise shares together with Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla — represented 26% of the earnings development, she stated. Meanwhile, 493 corporations had 3% revenue development.
“That’s not a healthy market,” Shalett stated. “That’s a very narrow market.”
When wanting on the S&P at this time, it is necessary to notice that what you are shopping for now, versus what you had been shopping for 10 years in the past, has modified, stated John Mullen, managing director and president at Parsons Capital Management.
The high 10 holdings at the moment signify roughly 40% of the index.
“If you’re buying the S&P, to a large extent, you’re buying these 10 names and, even more so, you’re buying tech and AI,” Mullen stated.
The solely high 10 exception that is not a tech or synthetic intelligence-related play is Berkshire Hathaway, he stated.
What generative AI means for the market
For the highest 10 firm names available in the market, the potential for generative AI is within the “sixth or seventh inning of being fully priced,” Shalett stated.
Consequently, Morgan Stanley is wanting to untapped alternatives the place productiveness can profit from generative AI, resembling in enterprise companies, financials and well being care, she stated.
“We’d much rather be in those places where the potential for the Gen AI story to be an upside surprise,” Shalett stated.
Morgan Stanley is encouraging shoppers to be energetic inventory pickers, in accordance to Shalett.
Today’s investors may take one other cue tied to Buffett, she stated. In June, Berkshire Hathaway purchased a $1.6 billion stake in medical insurance firm UnitedHealth.
The guess exhibits the idea in an upside margin potential in generative AI within the insurance coverage business, which is a extremely handbook, bureaucratic business that’s possible to be reworked, she stated.
Where to look to diversify
Megacap shares may proceed to carry out effectively from right here, in accordance to Joseph Veranth, chief funding officer of Dana Investment Advisors. The agency ranked No. 4 on the 2024 CNBC Financial Advisor 100 checklist.
But for investors who maintain the S&P 500 or ETFS which are concentrated within the greatest shares in that index, their focus has elevated as these corporations have outperformed, except they’ve rebalanced, Veranth stated.
Consequently, it may make sense now to modify these holdings to embrace smaller shares, he stated.
Morgan Stanley can also be encouraging shoppers to diversify into different sectors and to look to worldwide and rising markets for alternatives, in accordance to Shalett. The agency can also be pointing investors to the equal-weight index for the S&P 500, the place every firm represents the identical share.
An equal-weight index is the best means to diversify, Mullen stated. But investors may additionally think about issue ETFs that put caps on weightings or emphasize sure sectors, he stated. Or they may diversify into mid-cap, small-cap or the Russell 1000, which tracks the best rating 1,000 shares within the Russell 3000 index, he stated.