We expect equity markets to move higher as strong earnings broaden beyond AI, but wide gaps in performance between stocks mean portfolio outcomes depend more than ever on what investors own. Excluding strategic holdings, our analysis shows nearly 40% of self-managed equity investors on our platform hold more than half their portfolio in just 10 stocks or fewer, amplifying risk. To balance opportunity and concentration, investors should ensure their core equity allocation is broadly diversified across our preferred regions, sectors, and return drivers. We see three ways investors can reduce concentration risk without stepping away from the underlying drivers of the current cycle:
Diversify single-stock exposure across regions and sectors
Investors with concentrated stock positions should consider broadening their core equity allocation across our preferred markets and sectors to reduce reliance on a small number of names. We currently favor the US, Asia ex-Japan, India, Japan, Singapore, Australia, emerging markets, China, Europe, the Eurozone, and Germany. At a sector level, we favor US and European industrials, health care, and consumer discretionary, as well as US financials and European banks. Following strong recent performance, we have moved the relatively defensive Swiss market to Neutral as we shift toward more cyclical markets.
Add exposure with differentiated return drivers
Investors can also reduce reliance on a narrow group of stocks by adding exposure to preferred themes that broaden the sources of equity returns. We currently favor the following tactical opportunities: “European leaders,” supported by structural growth opportunities; “Luxury and lifestyles,” driven by cyclical earnings improvement; and “Automation and robotics,” where demand is recovering and AI is lowering barriers to broader adoption.
Use periods of strength to rebalance into broader equity exposure
We expect strong earnings and continued optimism around AI to support further gains, even as market leadership broadens beyond the largest technology stocks. Investors can use periods of strength to rebalance concentrated positions into multifactor strategies, which can help improve downside protection and diversify portfolios. Yield-generating structured investment strategies can also broaden sources of return within an equity allocation by adding an income element.
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