Weekly Market Commentary

Entering 2025, investors once again sang the chorus of U.S. exceptionalism. Driven by optimism around AI innovation from mega-cap tech and hopes of pro-business policies, they wondered—why look anywhere else? Yet two risks quietly played in the background: extreme market concentration and stretched valuations. U.S. equities accounted for nearly two-thirds of global markets, with the Magnificent Seven (Mag 7) alone comprising almost a third of the S&P 500. Valuations stood around 1.5 standard deviations above historical averages, leaving little room for disappointment.

Markets soared to new highs by mid-February, then the chorus changed. Policy uncertainty—from tariff whipsaws to fears of mass federal layoffs—triggered a rapid 10% correction, the seventh fastest since 1929. As our chart of the week shows, the Magnificent Seven quickly became the "Maleficent Seven," tumbling nearly 12% year-to-date and pulling the S&P 500 down 3.6%. Excluding these names, the index remained flat. Bitcoin, often touted as a hedge, also fell in lockstep (-13%), raising questions about its effectiveness during turmoil. Meanwhile, global markets—despite trade tensions—flourished on attractive valuations, a weaker dollar and fiscal tailwinds. China surged around 18%, fueled by AI breakthroughs rivaling the U.S., while Europe climbed nearly 16%, boosted by Germany’s historic €500 billion defense spending plan.

This stark divergence underscores how quickly market sentiment can shift. Portfolios, if left unchecked, naturally drift toward recent winners, increasing concentration risk. That risk intensifies when those winners are priced for perfection—because when valuations snap back, the recoil is usually swift and painful. With policy uncertainty weighing on U.S. exceptionalism, investors would be wise to rebalance and look beyond familiar shores.