Recent market commentary has been dominated by rising tensions in the Middle East, but the bigger investment picture is more complex than any single headline suggests. In our March Portfolio Perspectives, we examine both the immediate market consequences of the geopolitical shock and the deeper shifts taking place within global equity markets. The key question is not simply whether markets are concentrated, or whether valuations are high, but how investors should interpret a world in which market leadership is broadening even as headline risks rise.
The most important connection between events in the Middle East and financial markets is the oil price. Immediate supply concerns have driven a sharp rise in energy prices, with oil up around 50% since the crisis broke. That move has been large enough to push bond markets to reprice, particularly at the front end, and to lift 10 year yields by around 0.25%. Global equities have fallen by about 3%, while volatility has risen, but non oil markets have so far responded in a way that suggests investors are pricing a limited period of stress rather than a disorderly global shock. In other words, the energy move has been severe, but the broader market response has remained measured.
That distinction matters for the economic outlook. Before the oil spike, global growth was moderately firm and inflation was moving closer to central bank targets. If energy prices stabilise and begin to correct, that environment could reassert itself. The greater risk would be a prolonged period of elevated oil prices stretching into the second half of the year, which would place more pressure on growth and inflation expectations. For now, the outlook remains uncertain, which argues against making large portfolio changes on the back of headline moves alone. Diversification has already proved helpful in multi asset portfolios during the recent period of stress.
Alongside geopolitics, another dominant market theme has been concern over concentration in global equity indexes, particularly the heavy weight of U.S. megacap stocks. This concern is understandable. The top ten companies now account for around 24% of the MSCI World Index, up from 7% ten years ago and 20% five years ago. High valuations and high index weights naturally raise the risk that a correction in a small group of stocks could drag down broader equity returns. The historical parallel often cited is the “Nifty Fifty” period of the early 1970s, when a concentrated group of highly rated stocks underperformed sharply after valuation multiples compressed.
However, the current market backdrop is more nuanced than the concentration narrative alone implies. U.S. megacap stocks have in fact underperformed the wider global equity market for over a year. While the so called Magnificent 7 have still delivered positive returns since the start of 2025, stronger performance has come from other regions and sectors. Since the end of 2024, the U.S. has delivered the weakest absolute returns among the major regional blocs, while areas such as the UK, emerging markets, Asia ex Japan and Europe ex UK have performed better. At the sector level, materials, energy, industrials and utilities have all outperformed information technology. This tells us that the main story in equity markets has not been a fragile rally dependent on a handful of giant U.S. companies, but a broadening out of returns across the global market.
That broadening is also visible within technology itself. Investors are no longer treating the sector, or the AI theme, as a single trade. Semiconductor producers have generally been seen as some of the clearest beneficiaries of the AI investment cycle, while other parts of technology have faced greater scrutiny. Software is a notable example. Although earnings growth has remained positive, software valuations entered 2025 at demanding levels and have since de rated materially as investors questioned whether AI could commoditise parts of the business model. In recent months, the average price of firms in the software segment has fallen by around 25%, while sector valuation multiples have declined sharply from the highs seen in mid 2024.
This differentiation is important because it argues against the idea that today’s market is simply being driven by indiscriminate enthusiasm. Investors are increasingly selective. They are rewarding business models with stronger earnings visibility and clearer links to AI driven capital spending, while marking down those more exposed to disruption or weaker near term demand. Even outside technology, this pattern is visible. Utilities, for example, have benefited from expectations of rising energy demand as AI infrastructure spending accelerates, an unusual but instructive reminder that market leadership can emerge in unexpected places.
The investment conclusion is therefore more balanced than either a purely bullish or purely cautious narrative would suggest. Concentration risk remains elevated and should not be ignored. The sustainability of the AI investment boom is still an open question, and history shows that even dominant companies can face long periods of underperformance if expectations become too stretched. At the same time, today’s equity market is not behaving like a simple bubble. Leadership has broadened, returns are being generated from a wider set of sectors and regions, and market pricing is showing greater discrimination than headline concentration measures imply.
For portfolio construction, that reinforces a familiar but important lesson: diversification remains critical. Equity markets can continue to make progress even when one previously dominant segment loses momentum, provided capital rotates into other areas with stronger earnings support. That is why it remains important to focus not just on valuation, but on the resilience of underlying business models. In our view, equities should continue to be the highest returning public market asset class over the long term, but returns are likely to be lower than the double digit gains of the past decade. Against that backdrop, maintaining broad exposure while avoiding excessive dependence on U.S. megacap stocks remains a sensible way to navigate an increasingly differentiated market.
Read the March Outlook here.
