Large-cap stocks, particularly high-flying growth and tech names, have dominated the US stock markets in recent years, led by the Magnificent Seven stocks.
This year, large-caps and tech stocks took a big hit in the first three and a half months of the year, with many being the victims of their own success. Their valuations got so high, after years of outperformance, that gravity finally started catching up with them.
But in the past month, large caps have rallied, fueled in large part by the tariff pauses. Some, like NVIDIA (NASDAQ:NVDA) and Microsoft (NASDAQ:MSFT), have recovered all of their YTD losses in the past month. But many investors are still not convinced that large caps are back in this uncertain market, as new analysis from asset management firm Vanguard shows.
Tilting Toward Small- and Mid-Caps
In its Q2 ETF Industry Perspectives, Vanguard found that financial advisors are pulling away from large-cap stocks and diversifying their portfolios.
“Questions about overconcentration risk have been growing for over a year, and they’ve only grown louder following the recent pullback and volatility in equity markets,” wrote Vanguard experts Andrey Kotlyarenko, equity index senior investment product manager; David Sharp director, ETF Capital Markets; and Brad Collins, fixed income investment product management senior specialist.
Vanguard is seeing that shift take place, based on surveys of its 1,747 client portfolios. The research indicates that advisors are tilting their portfolios toward small- and mid-cap stocks and away from large- and mega-cap growth stocks.
According to the survey, advisors have been overweighting small- and mid-caps by about 10 percentage points above the benchmark allocations of around 25%.
Where They Should Be Going
While advisors are shifting away from large caps toward smaller company stocks, they are missing an opportunity to further diversify internationally, particularly in Europe.
The STOXX 600 Index, Europe’s equivalent to the S&P 500, is up 9% YTD, while the MSCI EAFE Index (NYSE:EFA) has returned about 14% YTD. And, as the Vanguard experts noted, they are generally cheaper than their U.S. counterparts.
“Considering the uncertainty around U.S. stock valuations moving forward, trimming at least some of that exposure can further help reduce concentration concerns. Prior to the March 2025 market volatility, U.S. stocks were at least two standard deviations more expensive than global stocks based on the last 20 years,” the Vanguard experts wrote.
Yet, most advisor portfolios are underweight in international allocations. Vanguard found that the median client portfolio has a 75% weighting in U.S. stocks, which is 12 points above the 63% benchmark.
“Adding more international stocks can make portfolios more diverse—a benefit that could pay off if the current valuation gap between U.S. and international stocks normalizes over the long run,” the Vanguard analysts wrote.
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