Why Market Concentration Sets Up Opportunity in Value and Small Caps

The market’s current concentration is setting up one of the most interesting valuation gaps we’ve seen in years. Dan Lysik explains on our recent MVP LIVE call.

Summary Points:

Uncertainty Has Peaked, Not Persisted

After spiking to record highs earlier this year, the U.S. Economic Uncertainty Index has begun reverting toward historical averages.
While tariff fears may create short-term volatility, we believe uncertainty will trend lower over time, creating a more constructive backdrop for equities.

Market Leadership May Be Set to Broaden

Much like the Dot Com era, market concentration is extreme — the top 10 stocks now make up more than 40% of the S&P 500.
Historically, similar levels have preceded periods of outperformance for small- and mid-cap equities and value-oriented strategies.

Tech Valuations Look Stretched

The technology sector’s price-to-sales ratio is nearing 10x, compared to 7–8x during the dot-com peak.
The “Magnificent Seven” now trade at high valuations, suggesting high expectations that may be difficult to sustain as growth moderates and capital intensity increases.

Value Hiding in Plain Sight

By contrast, low-valuation equities across the S&P 400 and S&P 600 trade at 40–80% discounts to the broader market, offering compelling entry points for long-term investors.
We see mispriced opportunities in smaller-cap, lower-multiple stocks with strong free cash flow potential.

Small Caps at a Historic Discount

Small-cap stocks are near a 90-year trough in relative performance versus large caps — a setup similar to the early 2000s, when small caps went on to outperform for seven consecutive years.
With improving earnings trends, favorable rate dynamics, and attractive valuations, we view this as a multi-year opportunity.

Comments dated 10/9/2025.

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