Global equity markets are increasingly dominated by a small group of US mega-cap stocks. The growth of passive investing has amplified concentration, leaving many investors exposed to sentiment-driven swings in a single sector.
For investors willing to look beyond the US, EAFE markets offer a diversified universe that spans high-quality companies across Europe and Japan. Valuations are more attractive, supported by a more balanced sector distribution. In today's environment of higher interest rates, wider dispersion, and rising geopolitical uncertainty, a value-oriented approach can help uncover overlooked opportunities across geographies and sectors.
US Concentration
Since the release of ChatGPT in 2022, the US market has added $21 trillion in value, over half of which has been driven by ten companies, largely tech and semiconductor firms buoyed by AI enthusiasm. Today, the top ten US stocks account for around 35% of the MSCI USA and 25% of the MSCI World Index, with their influence still growing. Passive flows reinforce this trend by directing capital to the largest companies, driving valuations higher. Such concentration leaves markets more correlated, with index performance heavily swayed by moves in a handful of dominant names.
While US market concentration is not new, history shows that market leadership rotates. In 1995, the ten largest stocks in the S&P 500 represented a diversified cross-section of the economy, spanning five sectors including industrials, energy, healthcare, consumer staples, and technology. Only one of those companies remains in the top 10 today. Fast forward to 2025, eight of the top ten are technology names, with the remaining two in financials. This stark shift highlights the unprecedented concentration shaping today's market. For investors, the key takeaway is that maintaining diversification helps reduce concentration risk and build more resilient portfolios.
S&P 500 Top Ten Stocks
Sources: Financial Times, S&P Capital IQ, Mondrian
The Case for Defensives
The structural growth story of US technology is undeniable. The rapid adoption of AI, cloud computing, and digital platforms has transformed industries and created enormous shareholder value. But with their recent stellar performance, many of the largest US names now trade at rich valuations, leaving little margin for error and exposing investors to concentration risk. The valuations of some of the classically defensive sectors, however, look very attractive, while also typically offering more compelling risk profiles. Indeed, defensives are trading close to historic lows relative to cyclically exposed sectors, despite their potential to provide stable earnings, stronger balance sheets, and reliable dividends in a higher-rate environment.[1]
Take Thermo Fisher Scientific, for example. As the world's largest life sciences company, it generates a significant share of revenue from recurring consumables and services and plays a crucial role in the research, development and manufacture of drugs. Post-pandemic, the company has struggled as its biotech customers work through a more difficult funding environment and Covid-19 related revenues roll off, while policy uncertainty around academic funding, tariffs and drug pricing have also weighed on sentiment. We believe these issues are temporary and have created a compelling entry point into a high-quality, resilient business with long-term growth drivers.
International Opportunities
Beyond the US, investors can find a wide range of compelling opportunities and global exposure in EAFE markets, where companies are often available at more attractive valuations, supported by solid fundamentals. MSCI EAFE offers a more balanced and diversified universe with 693 constituents drawn from developed markets outside the US and Canada. The top ten stocks in the index account for ~13% of total weight compared with 35% in MSCI USA. Looking back to 2015, the EAFE figure was broadly unchanged at 12%, whereas in the US the top ten weight has more than doubled from 17%. For active managers, this balance is particularly advantageous. With less dominance from the mega-caps, EAFE's structure creates a more fertile environment for stock selection. Greater dispersion across sectors and regions enables active value investors to identify companies whose fundamentals are not yet fully reflected in valuations.
Weight of Top Ten Stocks by Index
Source: MSCI, Factset, Mondrian
Europe, for example, provides access to sixteen different markets and a broad sector mix, which can help cushion portfolios should enthusiasm for US technology ease. Many European companies are truly global businesses, with nearly 60% of revenues generated abroad. Our portfolios include multinational leaders such as Sanofi, Roche, and Pernod Ricard, alongside regionally grounded firms with strong competitive positions like Lloyds and Associated British Foods. While Europe may trail in breakthrough digital technologies, it is taking a leadership role in decarbonization and clean energy. Companies such as Enel and Vinci are poised to benefit from the substantial investments required in grids and renewables. Valuations further strengthen the case: MSCI Europe trades at ~14x forward earnings versus 23x in the US, with low expectations creating scope for positive surprises.
Japan also presents a compelling case. Japanese corporates are typically conservatively run, with strong balance sheets and attractive valuations, traits that offer resilience in downturns and upside potential over the long term. Even without fully unlocking excess cash, governance reforms and a sharper focus on capital allocation could boost shareholder returns. Sundrug, one of Japan's largest drugstore operators, exemplifies the opportunity: a defensive business with attractive margins and exposure to structural tailwinds including ageing populations and increasing health care spending, currently trading at attractive levels after near-term growth concerns.
Conclusion
While US mega-cap stocks continue to dominate headlines and drive index returns, investors should remain mindful of the risks inherent in such concentration. Attractive opportunities exist both within the US (in underrepresented defensive sectors) and across international markets, where valuations are more compelling, leadership more diversified, and fundamentals strong. For long-term investors, particularly those with a value orientation, today's environment reinforces the importance of diversification, discipline, and active stock selection to identify resilient businesses and deliver sustainable returns across geographies and sectors.
[1] Defensive sectors include communication services, consumer staples, health care, real estate and utilities; cyclical sectors include consumer discretionary, energy, financials, industrials, information technology and materials
Disclosures
Views expressed were current as of the date indicated, are subject to change, and may not reflect current views. All information is subject to change without notice. Views should not be considered a recommendation to buy, hold or sell any investment and should not be relied on as research or advice.
This document may include forward-looking statements. All statements other than statements of historical facts are forward-looking statements (including words such as "believe," "estimate," "anticipate," "may," "will," "should," "expect"). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results to differ materially from those reflected in such forward-looking statements.
Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing, or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI's express written consent.
This material is for informational purposes only and is not an offer or solicitation with respect to any securities. Any offer of securities can only be made by written offering materials. The information set forth herein is a summary only and does not set forth all of the risks associated with the investment strategy described herein.
The information was obtained from sources we believe to be reliable, but its accuracy is not guaranteed, and it may be incomplete or condensed.
It should not be assumed that investments made in the future will be profitable or will equal the performance of any security referenced in this document. Examples of securities will represent only a small part of the overall portfolio and are used to illustrate our investment approach. Any holdings are subject to change and may not feature in any future portfolio. More information on holdings is available on request.
Unless otherwise stated, all returns are in USD.
All references to index returns assume the reinvestment of dividends after the deduction of withholding tax and approximate the minimum possible re-investment, unless the index is specifically described as a "Gross" index
Past performance is not a guarantee of future results. An investment involves the risk of loss. The investment return and value of investments will fluctuate.
Mondrian Investment Partners Limited is authorised and regulated by the Financial Conduct Authority (Firm Reference Number: 149507). Mondrian Investment Partners Limited is also registered as an Investment Adviser with the Securities and Exchange Commission (registration does not imply any level of skills or training).
