The Benefits of Diversification Were on Full Display in Q1 2025
At the beginning of 2025, just 10 of the largest companies in the S&P 500 comprised 38.5% of the index, far exceeding the previous peak of 29% seen in the late 1990s. Most readers of this column understand why this happened—the “Magnificent Seven” delivered a historic run of earnings and share price growth in 2023 and 2024, while other sectors lagged.1
In fact, 2024 marked the second consecutive year where fewer than 30% of companies outpaced the overall S&P 500 index—something that hasn’t happened since rare periods like 1998–1999, 1980, and 1973. These episodes of extreme market concentration often coincided with, or foreshadowed, economic slowdowns.2
It remains unclear if the U.S. economy is in the process of downshifting. But we know that historically, ‘narrow’ performance periods tend to be followed by broader market participation as economic conditions stabilize and expand. Over time, leadership rotates, with no single corner of the market remaining dominant forever.
Indeed, fast forward to Q1 2025, and we notably saw market concentration among a handful of major technology stocks began to unwind.
In January, concerns surfaced when DeepSeek, a little-known Chinese company, reportedly matched the AI capabilities of major U.S. players at a fraction of the cost. Questions arose over whether the massive infrastructure investments by large U.S. technology firms had overshot likely returns. This news, combined with mounting uncertainty around tariffs, triggered selling pressure—especially in growth and technology stocks, which had led the markets higher over the past two years.
Many view Q1 2025 as a period when stocks broadly endured sharp selling pressure as uncertainty rose. But that’s not an accurate telling of what transpired. Looking more closely at the data, it is evident that many categories of stocks actually held up quite well. Value widely outperformed Growth, with the Russell 1000 Value (IWD) rising +2.1% for the quarter while the Russell 1000 Growth (IWF) fell -10.0%.
Performance dispersion was also evident on a sector level. As seen below, 7 of 11 S&P 500 sectors posted positive returns in Q1 2025, which may surprise some readers and certainly cuts against the narrative that the entire market was in selloff mode.
Q1 2025 S&P 500 Index Sector Performance
S&P 500 Sector
Q1 2025 Return
Energy
+10.2%
Health Care
+6.5%
Staples
+5.2%
Utilities
+4.9%
Real Estate
+3.6%
Financials
+3.5%
Materials
+2.8%
Industrials
-0.2%
S&P 500 Total Return
-4.3%
Communications Services
-6.2%
Technology
-12.7%
Discretionary
-13.8%
Source: S&P Global
To be fair, the “Liberation Day” tariff announcements arrived in the second quarter, which means many of the sector-level gains from the first quarter have been pared back or reversed. Even still, as I write, Staples, Health Care, Real Estate, and Utilities all remain in positive territory for the year, with Financials essentially flat. The Technology sector, meanwhile, is down over -12%—which underscores the rotation we’ve seen, but also highlights the benefits of a diversified approach as leadership changes hands.
Bottom Line for Investors
At Zacks Investment Management, we believe that prudent investing requires anticipating—not reacting to—shifts in market leadership. The narrow market concentration we saw in 2023 and 2024 is showing signs of unwinding, reinforcing the critical importance of maintaining a diversified portfolio.
Our approach remains grounded in building portfolios that are broad-based and not overly dependent on any single sector, style, or asset class. Diversification, in our view, is not simply a defensive measure used to minimize downside risk; it is a proactive, all-weather strategy that seeks to position investors to participate in opportunities wherever and whenever they arise. As recent market dynamics have shown, leadership can and does change hands, often when it is least expected.
I recognize that headlines will continue to focus on volatility and uncertainty—from trade disputes to questions about the trajectory of U.S. growth. But history consistently demonstrates that economic seasons change, and with them, so does market leadership. Maintaining a broadly diversified portfolio with targeted tilts toward attractively valued sectors and asset classes gives investors the best chance to navigate these transitions successfully.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.
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