Something being discussed increasingly more often is how expensive equity markets are currently, which can be especially worrisome given the ongoing uncertainty clouding the global outlook and the numerous risks to growth and inflation.
Global Economic Policy Uncertainty Index1
(index; pre-2015 average=100)
Shaded regions represent periods of U.S. recession; source: Guardian Capital using data from PolicyUncertainy.com to July 2025
Now, to be clear, valuation metrics like the price-to-forward earnings ratio for market aggregates are historically elevated. For example, the MSCI World Index2, the Developed Market equity benchmark, trades at 22x forward-looking consensus earnings for the next 12 months, which is nearly two standard deviations above its average over the last two decades, while metrics for the U.S. are even more stretched versus their historical average. The only periods on record where the valuation multiple was higher were five years ago (the pandemic!) and at the turn of the millennium (the Tech bubble!).
Price-to-forward earnings ratio
(ratio)
Shaded regions represent periods of U.S. recession; source: Guardian Capital based on data from RBC Capital Markets and Bloomberg to August 28, 2025
In isolation, that suggests cause for concern since it points to markets being priced for perfection with no room for error.
As I often highlight, however, context is important.
First, consideration needs to be given to market interest rates. Certainly, rates are up markedly from their historical lows of 2020, and above those that prevailed over the pre-pandemic decade, but they are still *low* from a historical perspective. That matters because lower rates inflate valuation methods that rely on discounting future cash flows — lower discount rates increase the present value of future cash flows, all else being the same.
U.S. Treasury security yields
(percent)
Shaded regions represent periods of U.S. recession; source: Guardian Capital based on data from Bloomberg to August 28, 2025
With this in mind, scaling equity valuations to prevailing government bond yields (the so-called U.S. Federal Reserve (“Fed”) Model) still indicates that equities continue to be cheap on a relative basis.
If you go back to the Tech boom in the late 1990s, its higher aggregate Price-to-Earnings (“P/E”) ratios coincided with the 10-year Treasury rate at 6.5% and markets were expensive and subsequently collapsed; when that yield was below 1% in 2020, markets had room to run despite the elevated valuations. Arguably, bonds are still the relatively more expensive asset class right now, from a historical perspective, as we can see from the chart below.
Fed’s equity valuation model*
(percent; U.S. dollar basis)
*S&P 500 Composite Price Index divided by S&P 500 fair-value (defined as S&P 500 12-month forward consensus earnings per share divided by Bloomberg U.S. Treasury bond index yield); shaded regions represent periods of U.S. recession; source: Guardian Capital based on data from Bloomberg to August 28, 2025
Second, and perhaps most importantly — and it pains me as a student of economics and history — this time is different.
The past five years have been a period in which market index performance has been dominated by a small group of Tech-adjacent American Mega-Cap stocks, which have accounted for nearly half of equity returns over that period.
Contribution to total return, 2020 to 2024*
(percentage points)
*Magnificent 7 = Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla; source: Guardian Capital based on data from Bloomberg for the period from December 31, 2019, to December 31, 2024
Such narrow market leadership has made it even more difficult than normal for active managers to outperform broad benchmarks — any portfolio that does not have exposure to those companies, or is relatively underweight versus the benchmark, is virtually guaranteed to underperform; it is not a coincidence that 90% of global fund managers underperformed3 the S&P World Index4 over this span, which has driven more investors into lower-cost market-tracking investment products.
Passive or index-tracking investment funds, globally, have seen net inflows totalling US$5 trillion since 2020, while active managers have seen cumulative outflows of US$1 trillion. Passive investments now account for 43% of global assets under management compared to only 32% in 2019. The shift is even more stark in the U.S., where passive overtook active market share for the first time in 2023, and extended that lead to 53% in 2024.
Net fund flows and assets under management by product type, World
(trillions of U.S. dollars)
Source: Guardian Capital based on data from Morningstar for all Funds globally to December 31, 2024
Net fund flows and assets under management by product type, U.S.
(trillions of U.S. dollars)
Source: Guardian Capital based on data from Morningstar for U.S. Funds only to December 31, 2024
The increased shift to passive index-tracking investing, combined with the extremely narrow performance leadership, has exacerbated the issue of market concentration.
As it stands, the Magnificent 7 alone now account for one-third of the U.S. equity market, which is roughly one-quarter of the weight of the MSCI World Index5 and nearly one-fifth of the MSCI All-Country World Index6. Moreover, the largest 10% of U.S. stocks by market capitalization now account for 76% of total U.S. equity market, which is the highest proportion on record since 1927.
Largest 10% of U.S. equities’ share of total U.S. market capitalization
(percent)
Shaded regions represent periods of U.S. recession; source: Guardian Capital based on data from Kenneth R. French to June 2025
This serves to highlight that index benchmarks today are not really indicative of the performance of an “average” stock, but instead merely of a select, heavily-weighted few companies — something echoed by the growing performance gap between indexes weighted by market capitalization and those in which each stock is equally weighted, as can be seen by the chart below.
MSCI World Index
(index; January 1, 2020 = 100)
EW = equal-weighted. Source: Guardian Capital, based on data from Bloomberg to August 28, 2025
There are a couple of key implications for this current market structure that point to this time, in fact, being different.
For starters, the extreme concentration of global equity markets creates (potentially underappreciated) risks for passive investments should the fortunes of these few companies turn for the worse — and it also means that the related index-level weakness may not be indicative of a broadly weak market.
Conversely, should market leadership by these select few, mega-cap companies remain narrow — potentially supported by more funds flowing into passive investments that have high allocations in these top performing companies — the likelihood is that certain active investment portfolios could continue to see underperformance.
There is an extremely high historical correlation between the proportion of stocks within the S&P 500 that underperform the index itself and the relative performance of the cap-weighted S&P 500 Index7 versus the S&P 500 Equal Weight Index8.
In simple terms, when fewer stocks outperform the index (narrow leadership), passive investment (proxied by capitalization-weighted indexes) has done better; when a greater proportion of stocks beat the index (broad-based performance), active management tends to do better.
Share of its constituents outperforming the S&P 500 Index (LHS); and S&P 500 Index returns relative to S&P 500 Equal Weight Index
(LHS ‒ percent) (RHS ‒ percentage points)
*2025 is year-to-June; source: Guardian Capital based on data from S&P Global, Apollo Global Management and Bloomberg
The equal-weight (EW) index represents all companies in the index equally, while the cap-weighted version is more heavily skewed to the large-cap, and currently some of the top-performing companies.
At the same time, the divergent performance between those top performers, which are leaders in the secular artificial intelligence growth story, means that, while overall market metrics may point to expensive valuations, the average stock across the globe appears to be relatively fairly valued given the (recently broadly upgraded) earnings outlook.
Price-to-forward earnings ratio, MSCI World
(ratio)
EW = equal-weighted. Source: Guardian Capital, based on data from Bloomberg to August 28, 2025
This is especially the case when the U.S. is taken out of the equation. As shown in the following chart, the MSCI World Index excluding the U.S. trades at 16x forward earnings right now, which is above the average but within the realm of “normal”, while the equal-weighted version of that index sits smack dab on its average.
MSCI Index price-to-forward earnings ratio
(standard deviations from 10-year average)
EW = equal-weighted. Source: Guardian Capital, based on data from Bloomberg to August 28, 2025.
That suggests that investment opportunities are, in fact, out there (particularly outside the U.S.) for more discriminating investors to acquire quality assets at a more reasonable price, and which have the potential to benefit from broadening performance and improvements in market sentiment.
That said, continued narrow momentum from these select few large-cap Tech companies would likely weigh on the relative performance of more active strategies, which are limited by their investment, risk and style constraints that either prevent holding these companies or holding them in large enough allocations.
David Onyett-Jeffries
David Onyett-Jeffries is Vice President, Economics & Multi Asset Solutions, at Guardian Capital LP (GCLP). He provides macroeconomic guidance to GCLP and its affiliates. Additionally, he is a portfolio manager of GCLP’s multi-asset portfolios and funds and works closely with GCLP’s Directed Outcomes team.
1 The “Global Economic Policy Uncertainty Index” is a GDP-weighted average of national Economic Policy Uncertainty (EPU) indices for 16 countries that account for 2/3 of global output. Each national EPU index reflects the relative frequency of own-country newspaper articles that contain a trio of terms pertaining to the economy, uncertainty and policy-related matters.
2 MSCI.com, Index Factsheet, MSCI World Index (USD), August 29, 2025, https://www.msci.com/documents/10199/178e6643-6ae6-47b9-82be-e1fc565ededb
3 SPGlobal.com, SPIVA U.S. Scorecard Year-End 2024, August 29, 2025, https://www.spglobal.com/spdji/en/documents/spiva/spiva-us-year-end-2024.pdf
4 S&P Global, Overview, August 29, 2025, https://www.spglobal.com/spdji/en/indices/equity/sp-world-index/#overview
5 The MSCI World Index captures mid- and large-cap representation across 23 developed market countries.
6 The MSCI ACWI is a market capitalization-weighted index of equities in both Developed and Emerging Markets
7 The S&P 500 is an index of 500 stocks designed to reflect the risk/return characteristics of the large-cap US equity universe.
8 The S&P 500® Equal Weight Index (EWI) is the equal-weight version of the S&P 500. The index includes the same constituents as the capitalization-weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight – or 0.2% of the index total at each quarterly rebalance.
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Published: September 11, 2025
