The Road Not Taken
There was a time when every high schooler in the United States had to memorize the Robert Frost poem The Road Not Taken, the poet’s classic reflection on individuality, choices and the passage of a life, set, like many of his poems, in nature. Frost’s traveler, of course, chooses “the road less travelled by,” and that choice ends up making “all the difference.” We do not know for certain that the difference has been positive or negative, but the poem’s tone suggests the author is generally pleased with where the path has taken him. However, whether or not the decision was the right one was far from clear when it was made.
It’s a lot like investing, especially when markets are as concentrated as they have ever been.
Financial markets are ebullient right now, with the S&P 500 and the NASDAQ each reaching new record highs in late July. The S&P 500 is now up 28 percent off its April tariff-shock lows, driven higher by solid corporate earnings, especially those posted by tech megacaps, and optimism around a Fed rate cut or two later this year.
The S&P 500 returned 2.2 percent in July and has posted a 9 percent advance year-to-date. Tech shares and growth shares turned in a particularly solid month, with the NASDAQ and the Russell 3000 Growth Index each up 3.7 percent. Even with July’s powerful advance, international has been the place to be so far this year, with the MSCU All Country World Index Ex USA having returned 18.5 percent in 2025.
Peak Concentration in the U.S.
Let’s examine domestic returns more closely. Forty percent of this year’s gains in the S&P 500 have come from the ten largest stocks in the index. For the record, they are: NVIDIA, Microsoft, Apple, Amazon, Google, Meta, Broadcom, Berkshire Hathaway, Tesla and JPMorgan. Coincidentally, those ten stocks now account for 40 percent of the entire index in terms of market capitalization. That’s a record. The other 490 stocks are crammed into the other 60 percent of the market.
We’ve written many times about this concentration and our concerns about it, and that was when the share of the top ten stocks was only about a third of the index, which was already historically high.
So why is this happening? Powerful earnings growth posted by tech titans such as Microsoft and META has fueled the rally, and so has the price momentum generated by these rallies themselves. (Stocks that go up tend to create their own gravity for a while.) Still, to be fair, the earnings growth in megacap tech has been real, and those same top ten stocks that constitute 40 percent of the S&P 500 happen to represent almost a third of the index’s total earnings.
On top of that, large-cap tech seems to be less exposed to the impact of tariffs, which are expected to suppress economic growth in the back half of this year. Accordingly, small-caps, whether growth stocks or value stocks, have trailed their larger brethren this year.
Way Leads On To Way
When we deviate from the market, we are guaranteed to experience something other than a market return; that’s all we know for certain. Our portfolios generally skew slightly toward value, small-cap and quality, with considerable international exposure. So, while we have meaningful Magnificent Seven exposure, our exposure does not approach the market’s level of concentration. We’re fine with this. Decades of evidence, along with some level of common sense, suggest that not always following the crowd will result in favorable outcomes over time. It worked for Robert Frost, and I think it will continue to work for us, too, in the long run.
The Road Not Taken
Two roads diverged in a yellow wood,
And sorry I could not travel both
And be one traveler, long I stood
And looked down as far as I could
To where it bent into the undergrowth;
Then took the other, as just as fair,
And having perhaps the better claim,
Because it was grassy and wanted wear;
Though as for that the passing there
Had worn them really about the same,
And both that morning equally lay
In leaves no step had trodden black.
Oh, I kept the first for another day!
Yet knowing how way leads on to way,
I doubted if I should ever come back.
I shall be telling this with a sign
Somewhere ages and ages hence:
Two roads diverged in a yellow wood, and I—
I took the one less traveled by,
And that has made all the difference.
Robert Frost
For more information, please reach out to:
M. Burke Koonce III
Investment Strategist
bkoonce@trustcompanyofthesouth.com
Daniel L. Tolomay, CFA
Chief Investment Officer
dtolomay@trustcompanyofthesouth.com
DISCLOSURES
This communication is for informational purposes only and should not be used for any other purpose, as it does not constitute a recommendation or solicitation of the purchase or sale of any security or of any investment services. Some information referenced in this memo is generated by independent, third parties that are believed but not guaranteed to be reliable. Opinions expressed herein are subject to change without notice. These materials are not intended to be tax or legal advice, and readers are encouraged to consult with their own legal, tax, and investment advisors before implementing any financial strategy.
