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A Precariously Concentrated Top 10 Makes the Case for Quality
October 2, 2025
Jim Madden, CFA, Tony Tursich, CFA, and Beth Williamson
Summary Points:
- The US equity market has rallied through good news, bad news and no news, with the S&P 500 near record highs.
- We believe current market levels and valuations indicate complacency, and concentration risk in both the stock market and economy point to dangerous vulnerabilities.
- These concentration risks could play out in various scenarios, but we believe quality growth stocks across sectors are positioned to benefit from the most likely ones.
- While SROIX advanced during the quarter, our focus on diversification, valuation and quality contributed to lagging performance versus the broad equity market.
Good news? Bad news? No news? It didn’t matter since nothing was able to stop stocks’ inexorable march upward. The S&P 500 Index is now more than 30% off its April lows and near all-time highs.
With valuations also near historic highs, what can we expect going forward? Certainly, new highs are possible, but we believe closer inspection is now revealing that the economy and the stock market are showing signs of vulnerability.
First, we have a very narrow stock market, with 10 stocks driving over half the market capitalization gain since 2021. Perhaps even more worrisome is that nine of these 10 stocks are essentially AI-related.
In addition, we have a very narrow economy, with 10% of earners now responsible for 50% of US spending. This is an all-time high, with asset owners benefitting from unprecedented Fed liquidity and suppressed interest rates following the Great Financial Crisis.
So, we have an economy based on the spending of the top 10%, and those top 10% are highly dependent on the stock market. Meanwhile, we have a stock market highly dependent on 10 stocks, and those 10 stocks are highly dependent on possible returns on AI spending.
As long-time quality investors, the Sustainable Equities team has watched quality lag for the past four-plus years. What does the current setup we described above mean for quality stocks going forward? While there are a range of outcomes and it’s impossible to predict the timing of any market disruption, here are two scenarios we consider to be more likely:
- All the spending on AI starts to see a return as it broadens out across the economy. This would be positive for quality stocks, given that they have shown the ability to adapt, innovate and deal with the kind of disruption AI will bring. With that history, we feel quality stocks have the best chance to benefit from AI efficiencies.
- If the massive spending on AI infrastructure does not produce expected returns, we would expect to see a slowdown in the earnings of the top 10 stocks. This slowdown would ripple across the economy and likely result in a market correction and increased volatility. This type of market scenario favors quality stocks as investors seek the safety of consistent performers.
While our quality emphasis, valuation discipline, and diversification across sectors and positions have not been aligned with market sentiment, we believe the top-heavy nature of the market and economy strengthens the case for our approach.
Total Returns as of 09/30/25
| 3Q 2025 | YTD | 1 Year | Fund Inception | |
|---|---|---|---|---|
| SROIX | 5.69% | 11.00% | 9.30% | 13.67% (2/3/23) |
| S&P 500 Index | 8.12% | 14.83% | 17.60% | 21.65% |
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