US stock market index weak active management funds will welcome spring?

At the beginning of 2025, the stock market is showing new characteristics, with a significant increase in the divergence of individual stock performance, resulting in more stocks outperforming the S&P 500 index. After experiencing highly concentrated market performance in the past two years, this change has provided investors with broader opportunities, especially for those looking to outperform the benchmark index. As of last Friday, the S&P 500 index has risen 2.4% year-to-date, with over 49% of component stocks performing better than the index. If this trend continues, it will mark the broadest market participation since 2022. In contrast, in 2023 and 2024, less than 30% of S&P 500 component stocks were able to outperform the index. At that time, the market's rise was mainly driven by a few super large-cap tech stocks, particularly NVIDIA Corporation (NVDA.US), which led the S&P 500 to rise over 20% for two consecutive years. This phenomenon last occurred in 1998 and 1999. This change, coupled with option traders expecting greater divergence in individual stock performance, may signal the impending spring for actively managed funds. Financial experts have stated to the media that the increased divergence in individual stock performance is a positive signal for active management investment strategies. Ben McMillan, Chief Investment Officer at IDX Advisors, stated, "The greater divergence in the market is good news for active management." He even believes that active investment strategies may be entering another "golden age". Cboe Global Markets Inc's Dispersion Index of individual stock divergence has recently been on the rise, reaching a new high in three years at the end of January. Typically, this index declines during earnings seasons for companies, but in recent weeks it has been increasing. The reasons leading to this phenomenon include: Improvement in corporate earnings: In the fourth quarter of 2024, the market generally expected earnings growth to be more widespread, rather than concentrated on the "Big Seven". This situation is gradually becoming a reality, reducing the market's extreme concentration. Market and economic uncertainties: Investors are beginning to focus on the risks that could arise from President Trump's policy agenda, as well as whether large-scale investments in artificial intelligence infrastructure by companies are wise. In addition, there are doubts about the true robustness of the US economy. Uncertainties related to artificial intelligence, tariffs, and macroeconomic outlook: Mandy Xu, Director of Derivatives Market Intelligence at Cboe, stated in a media interview that even though earnings season has ended, single stock volatility remains high, primarily influenced by AI investments, tariff policies, and economic outlook. In recent years, actively managed funds have been underperforming, especially against a backdrop of highly concentrated markets. Data from the S&P Dow Jones Indices shows that if fund managers did not heavily invest in popular stocks from the "Big Seven", such as NVIDIA Corporation, or other momentum stocks like Palantir (PLTR.US) and Vistra (VST.US), they were almost guaranteed to underperform the S&P 500 index. In the first half of 2024, actively managed funds continued to face challenges, especially those investing in US and global stocks. Anu Ganti, Director of US Index Investment Strategy at S&P Dow Jones Indices, stated, "The first half of 2024 is likely to be remembered as another challenging period for the active management industry." It is worth noting that market styles are changing. The once overvalued information technology sector has recently underperformed, while sectors with lower valuations such as consumer staples, financials, and healthcare have seen good gains at the start of 2025. Most of the companies in the "Big Seven" have performed poorly since the beginning of 2025, with the exception of Meta (META.US), whose stock price has risen significantly. The other members have either declined or remained relatively stable. However, despite the decrease in market concentration, the top 10 stocks in the S&P 500 index (including all the "Big Seven") still account for over 37% of the total index market capitalization. However, this proportion has decreased from the peak in 2024. Jeff Schulze, Managing Director of Economic and Market Strategy at ClearBridge Investments, pointed out that historical data shows that when market concentration in the S&P 500 index exceeds 24%, equal-weighted indices tend to outperform market-cap weighted indices in the following years. Since 1989, this pattern has been verified in 96% of cases. Although there is limited historical data, currently, this pattern seems to be holding true. Since the beginning of 2025, the Invesco S&P 500 Equal Weight ETF (RSP.US) has risen close to 3%, while the S&P 500 index has only risen by 2.3%. In addition to the US market, global stock markets are also experiencing strong gains. European and Chinese stock markets have recorded double-digit gains in 2025, far surpassing the S&P 500 index. Meanwhile, due to actively managed funds continuously underperforming benchmark indices, investors are increasingly shifting their funds to lower-cost index ETFs. Vanguard S&P 500 ETF (VOO.US) has recently surpassed the SPDR S&P 500 ETF Trust (SPY.US) to become the largest ETF in the US, with assets under management totaling $632 billion.