A Growing Number of Shares Are Outperforming the S&P 500, Making It a Stock Picker's Market

The investment landscape in early 2025 is proving favorable for stock pickers, with a growing number of individual stocks outperforming the broader market. After two years of unusually concentrated performance dominated by a handful of large-cap stocks, a wider range of companies are now leading gains, creating more opportunities for investors aiming to beat their benchmarks.

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As of last Friday’s close, nearly 49% of S&P 500 stocks had posted year-to-date gains exceeding the index’s overall 2.4% rise. If this trend continues, it would represent the highest level of participation since 2022, according to a MarketWatch analysis of FactSet data. This marks a significant shift from the past two years, during which fewer than 30% of S&P 500 constituents outperformed as the index’s growth was largely driven by a select group of mega-cap stocks—most notably Nvidia.

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Historically, the S&P 500 has rarely been so dependent on such a small group of stocks, with the last comparable period occurring in 1998-1999. Now, the landscape appears to be shifting, offering potential advantages for active investors.

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This broader participation, combined with rising dispersion in single-stock performance as signaled by options market trends, may signal a more favorable environment for active fund managers.

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Ben McMillan, Chief Investment Officer at IDX Advisors, noted that increasing dispersion tends to favor active management. He suggested that current conditions could herald another strong period for actively managed funds, a sentiment echoed by other financial professionals.

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The Cboe Dispersion Index, which tracks expected variation in performance among S&P 500 stocks, recently hit a three-year high in late January. While this index typically declines during earnings season, it has instead been rising—an unusual development that highlights increasing volatility and differentiation among individual stocks.

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Several factors contribute to this shift. One is the broadening of earnings growth beyond the "Magnificent Seven" tech giants, which had previously dominated market gains. Additionally, uncertainty surrounding the economy, corporate investments in AI, and potential policy shifts under President Trump’s administration are all influencing stock performance.

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Mandy Xu, head of derivatives market intelligence at Cboe, noted that individual stock volatility remains high even after earnings announcements, driven by concerns over AI, trade policies, and economic conditions.

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Actively managed funds have historically struggled to outperform their benchmarks, but the past few years have been particularly challenging. Many active managers lagged behind the S&P 500 due to the dominance of high-flying stocks like Nvidia, Palantir, and Vistra. Without significant exposure to these momentum stocks, fund managers found it difficult to keep pace with the broader market.

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S&P Dow Jones Indices has documented these struggles, with its October 2024 report highlighting another difficult period for stock pickers, particularly in U.S. and global equities.

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However, recent market shifts may present new opportunities. High-growth sectors such as technology have stalled, while undervalued sectors like consumer staples, financials, and healthcare have started the year strong. With most of the "Magnificent Seven" struggling—except for Meta Platforms, which has continued to rise—other stocks are stepping up to drive market gains.

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Despite this shift, concentration within the S&P 500 remains significant. The index’s 10 largest stocks, which include all members of the "Magnificent Seven," still account for over 37% of total market capitalization. However, this is a decline from its peak in 2024, suggesting that smaller stocks may continue to outperform.

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Historically, when S&P 500 concentration has exceeded 24%, equal-weighted versions of the index have tended to outperform in subsequent years. According to ClearBridge Investments’ Jeff Schulze, this trend has held true 96% of the time since 1989.

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So far in 2025, this pattern is playing out once again. The Invesco S&P 500 Equal Weight ETF, which gives all stocks in the index the same weighting rather than favoring the largest companies, has gained nearly 3% year-to-date—outpacing the traditional market-cap-weighted S&P 500, which is up 2.3%.

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Additionally, stocks outside the U.S. have been rallying, with key European and Chinese equity indices already posting double-digit gains this year.

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Despite the recent shifts favoring stock pickers, passive investing remains a dominant trend. Investors have continued to pour capital into low-cost index-tracking ETFs rather than actively managed funds. The Vanguard S&P 500 ETF recently overtook the SPDR S&P 500 ETF Trust as the largest U.S.-listed ETF, with assets under management reaching nearly $632 billion.

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On Monday, U.S. stocks were mostly higher, rebounding from their worst session of the year. The S&P 500 traded flat at 6,013, while the Dow Jones Industrial Average rose 186 points, or 0.4%, to 43,609. Meanwhile, the Nasdaq Composite was down 94 points, or 0.5%, at 19,431.

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The shift in market dynamics suggests that active managers may finally have a better chance of outperforming benchmarks. A broader range of stocks is contributing to gains, dispersion is rising, and equal-weighted indexes are seeing stronger performance. While passive investing remains popular, stock pickers may find 2025 a more favorable environment than previous years.

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