It’s Now a Stock Picker’s Market: What It Means for Your Portfolio

The financial landscape has shifted dramatically in 2025, making it a prime time for stock pickers. The resurgence of individual stocks outpacing the performance of the S&P 500 index is creating new opportunities for investors looking to outperform their benchmarks.

Current Market Conditions Favored Stock Pickers

According to a recent analysis by MarketWatch leveraging FactSet data, more than 49% of stocks in the S&P 500 have achieved year-to-date gains greater than the index’s modest 2.4% increase as of Friday’s close. This signals a dramatic shift from the previous two years when less than 30% of S&P 500 members were able to surpass the index, heavily led by a select few megacap stocks, mainly Nvidia Corp. (NVDA).

During 2023 and 2024, the S&P 500 saw back-to-back gains exceeding 20%, a performance more reliant on a concentrated set of stocks than any time since the late 1990s. The current surge in individual stock performance suggests a broader market breadth, potentially benefiting active managers aiming for higher returns through targeted stock selection. Ben McMillan, chief investment officer at IDX Advisors, emphasized that rising performance dispersion among stocks is advantageous for active management, indicating a possible “golden age” for these investment strategies.

What is the Dispersion Index Indicating?

The Cboe Dispersion Index, which gauges the expected variation in performance among S&P 500 shares, recently peaked at a three-year high. Traditionally, this index declines during quarterly earnings periods. However, it has risen this time around, primarily driven by improved quality in corporate results and heightened uncertainty regarding market conditions and the economy.

According to Mandy Xu, head of derivatives market intelligence at Cboe, ongoing concerns regarding artificial intelligence, tariffs, and the broader economic outlook contribute to elevated single-stock volatilities. The current landscape appears favorable for investors willing to navigate through this volatile environment with an active management strategy.

The Impact on Active Managers

Despite the recent uptick in opportunities for stock pickers, active management has struggled to outperform benchmarks over the years. This issue has intensified recently, as performance has been concentrated in a few high-flying stocks. The latest report from S&P Dow Jones Indices indicated that the first half of 2024 marked another challenging period for active managers, particularly those focusing on U.S. equities. Anu Ganti, head of U.S. index investment strategy at S&P Dow Jones Indices, noted that many active managers found themselves lagging the index unless they invested heavily in formidable momentum stocks.

Looking ahead, cheaper sectors, particularly consumer staples, financials, and healthcare stocks, have shown promise, leading the market performance in early 2025. While shares of the renowned “Magnificent Seven” stocks have either stagnated or declined, with only Meta Platforms Inc. (META) seeing substantial gains, it appears that smaller-cap stocks may continue to shine.

An Equal-Weighted Perspective for Future Gains

Despite the dominant influence of the largest stocks, increasing evidence suggests that smaller stocks could be poised for outperformance. Historical data indicates a notable trend: when concentration within the S&P 500 surpasses a threshold of 24%, an equal-weighted version of the index tends to outperform its capitalization-weighted counterpart. This phenomenon has held true 96% of the time since 1989.

As of now, the Invesco S&P 500 Equal Weight ETF (RSP), which tracks this equal-weighted index, has seen a nearly 3% increase since the beginning of the year—outpacing the traditional S&P 500 index’s 2.3% gain. Adding to the excitement is the performance of international equity markets, with major indices in Europe and China already showing double-digit gains in 2025.

The Shift Towards Passive Investment Strategies

The struggles of actively managed funds have prompted a surge in investments toward low-cost index-tracking ETFs. The Vanguard S&P 500 ETF (VOO) has now surpassed the SPDR S&P 500 ETF Trust (SPY) as the largest U.S.-listed ETF by assets, boasting nearly $632 billion under management.

Conclusion: Positioning for Potential Opportunities

The evolving market dynamics signal a shift toward a stock picker’s paradise. Increased dispersion among stocks offers significant opportunities for active managers as they adapt to these changes. However, investors should remain cautious and utilize strategic approaches—whether through active stock selection or reliable index-tracking ETFs—to maximize portfolio performance in 2025 and beyond.