March, 2026
For the third consecutive year, the S&P 500 delivered a double-digit gain, rising 16.4% in 2025. However, the strongest performance was highly concentrated. Seven of the index’s ten best-performing stocks were driven primarily by enthusiasm around artificial intelligence (AI). Of the S&P 500’s 11 sectors, only three—technology, communications, and industrials—outperformed the broader index. Across all three, AI adoption served as the primary catalyst, benefitting everything from chipmakers and hyperscalers (large cloud service providers) to power infrastructure and other AI-related support services.
Despite these headline gains, a large portion of equities underperformed the broader market. Surprisingly, nearly 40% of S&P 500 constituents declined in price during 2025. Smaller companies also lagged sharply. The S&P MidCap 400 Index gained only 5.9%, while the SmallCap 600 Index rose just 4.2%. Clearly, many companies not directly tied to AI experienced a far more modest year in the stock market.
The very largest technology companies have come to dominate market performance and are widely referred to as the “Magnificent Seven.” As a group, Nvidia, Apple, Microsoft, Alphabet, Amazon, Meta, and Tesla collectively gained 25% in 2025. Along with another tech stock, Broadcom, these few companies now represent roughly 40% of the S&P 500’s total market capitalization—up dramatically from a decade ago, when the top eight stocks accounted for only 15%. Due to their sheer size, this small group of companies can dictate the direction of the overall index. For comparison, the equally weighted S&P 500 Index returned 9.3% last year.
It is difficult to dispute that AI will be a transformational technology. Enormous amounts of capital are being deployed to accelerate its development, and none of the major technology firms can risk falling behind—even though ultimate returns on investment remain uncertain. Many AI-related companies, along with those supporting AI infrastructure, have already experienced substantial price appreciation and are now trading at highly-elevated valuations. This has raised reasonable concerns about the potential for an investment bubble. While some companies may continue to excel, others will not, and long-term performance will likely pale relative to recent gains.
History suggests that returns should broaden to better include other areas of the market. Over the past 30 years (which included a wide range of market environments), the S&P 500’s annualized return trailed the MidCap index by 1.1% per year and the SmallCap index by 0.3% per year. The past three calendar years, however, have been dramatically different, with large-cap stocks outperforming mid-caps by 10.5% annually and small-caps by 13.0% annually. While the timing of any reversion toward historical norms is unpredictable, such a wide gap in performance is likely unsustainable long-term.
Many large technology companies should remain attractive investments. Their size reflects years of exceptional growth in revenue, earnings, and cash flow. AI will also generate both new winners and losers, and we remain in the very early stages of its evolution. However, on a relative basis, other companies that continue to perform well fundamentally should also see their stock prices benefit more than they have recently.
It is not unusual for investors and speculators to chase the latest trend, assuming certain stocks can only rise despite extreme valuations or unproven business models. Eventually, this behavior self-corrects. As Warren Buffett has famously observed when distinguishing popularity from value: “In the short run, the market is a voting machine; but in the long run it is a weighing machine.”
