Active stock funds reel as Big Tech’s grip on market strengthens

Momentum built up by stock pickers has been sputtering as the frenzy around artificial intelligence sent technology companies soaring. Photo by Michael M. Santiago/Getty Images

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Just one in five large-cap core mutual funds has outperformed the S&P 500 Index so far this year, data compiled by Strategas Securities show. That’s on pace for the worst reading since 2021.

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After benefiting from a rotation out of megacap shares and into the broader market earlier this year, stock pickers are reeling as money floods back into a narrow group of AI-fuelled heavyweights. And the impending public debut of SpaceX, Anthropic PBC and OpenAI only exacerbates worries about a cluster of technology high-flyers dominating the stock market.

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“For stock pickers, life continues to get more difficult, and the upcoming IPOs will not help,” said Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute. “They have a shot at outperforming if they can over-lever to the theme, especially at lows, and reduce at the highs, but short of that they will probably struggle to do so just with idiosyncratic stock exposure.”

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The growing concentration in the stock market — where the weighting of the information technology sector has roughly doubled in the last 10 years — is on display in the gap between the S&P 500 and a version of the gauge that makes little distinction between megacap titan Nvidia Corp. and relative minnow News Corp. The S&P 500 has gained 16 per cent this quarter, compared with a 9.4 per cent gain in the S&P 500 Equal-Weight Index. The 6.3 percentage point gap is the widest since 2024.

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“Megacap dominance doesn’t eliminate opportunity, but it narrows it,” said Nathan Thooft, a senior portfolio manager at Manulife Investment Management. “Idiosyncratic alpha is more likely in the long tail, non‑consensus names, or via relative/value rotations.”

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“For active managers, alpha is shifting from ‘what to own’ to ‘how to size and manage risk around the leaders,’” he added.

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Active managers had a moment of respite in February, when concern over technology megacaps’ stretched valuations and their spending plans on AI helped mutual funds outperform their benchmarks at a rate not seen since 2007. Some active mutual funds simply can’t load up on the biggest technology stocks to the same degree as the benchmark due to regulations that limit their concentration in an individual stock.

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Momentum built up by stock pickers has been sputtering since then as the frenzy around artificial intelligence sent technology companies soaring. Only 26 per cent of large-cap, actively managed mutual funds outperformed benchmarks in May, below the monthly rate of 46 per cent and worst rate since November 2024, according to data from Bank of America Corp. Some 20.5 per cent of large-cap core funds have outperformed the S&P 500 so far this year, data compiled by Strategas show.

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That’s seen a cautious sign for an industry already on the defensive after investors yanked roughly US$1 trillion from active equity mutual funds last year alone.

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Active managers are “caught behind a concentrated rally,” Bank of America strategist Victoria Roloff wrote in a note published on Wednesday. “Although performance dispersion within equities remains elevated and correlations remain low — conditions that typically support stock selection — the market continues to be narrowly driven by mega cap growth.”

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