Investing.com -- Investors should remain invested in US equities but shift their allocations away from highly concentrated stocks and cap-weighted indices like theInstead, Kostin recommends diversifying toward equal-weighted indices, which he argues offer better long-term risk-adjusted returns amid the current market environment.
The dominance of these few stocks has been extraordinary. Year-to-date, the Magnificent 7 has returned 41%, compared to 18% for the other 493 companies, accounting for 47% of the index’s total gains. However, Kostin argues that this level of concentration is unsustainable and historically associated with lower forward returns.
Second, the valuations of these dominant stocks are historically high, trading at a negative risk premium for the first time in over 20 years. This implies that investors “are not being sufficiently compensated for this increased risk,” Kostin notes. To counterbalance these risks, the strategist advises non-taxable investors, such as pension funds and sovereign wealth funds, to allocate equity investments to equal-weighted benchmarks.