If 2025 ends strong, it will be the third straight year that the S&P 500 has notched double-digit gains. Not too shabby.
But that has many advisors worried about valuations in the large-cap space, especially in technology stocks connected to artificial intelligence. The Magnificent Seven, including Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla, now comprise one-third of that index’s market value. Some advisors are looking to diversify away from those names, and note that clients are worried that the market is due to correct. After all the hand-holding, however, advisors should remind clients why diversification matters to their financial plans, said Patrick Runyen, director of organic growth at Modera Wealth Management. He’s been reducing large-cap and international exposure in order to rebalance after this year’s run-up in both sectors.
“What we’re talking about with clients is keeping the diversified strategy in place and selling high and buying low on the margins,” he said.
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For many advisors, the first step is trimming exposure to the Mag 7 names, even if that means selling some of this year’s best-performing companies. “Almost at this point, it represents an asset class because it’s so demonstrably different than other equities,” said Bill Harris, CEO at Evergreen Wealth. “It’s not a diversified position … It’s a high-risk position, so if you’re looking for risk-adjusted return, you ought to move away from it. But that doesn’t mean get out.”
He remains invested in large-cap stocks but is breaking up the S&P 500 index into individual securities to modify exposure to the Mag 7. “You’ve got hundreds of individual securities, (so) you can do a heck of a lot better job with tax-related things such as tax-loss harvesting or asset location across taxable and tax-deferred accounts,” he said.
On the flip side, Steve Conners, president of Conners Wealth Management, said he’s looking at the large cap healthcare sector, particularly at pharmaceuticals and biotechnology. “The artificial intelligence theme has left them mostly ignored. Valuations are still attractive at current levels,” he said. He is avoiding health insurers in the broader healthcare space, however, saying they remain under too much pressure with the focus on rising health insurance premiums. “I’m not really interested in being the hero on United Healthcare or any of the health insurers.”
Large-cap financials remain inexpensive compared with the broader market as well. “They are always less expensive, but they seem, on a relative basis, better than usual. Money-center banks look more attractive than the regional and community banks as they don’t have as much leverage to loan volume and interest rates, besides being less risky,” Conners said.
Roland Chow, financial planner and portfolio manager at Optura Advisors, also expects financials to do well in 2026 with the push for deregulation by the Trump administration and the Federal Reserve cutting rates. Energy and materials are among Chow’s 2026 favorites for two reasons: They are adjacent to the AI boom by supporting the value chain, and they should benefit from the secular bull market in commodities and energy.
Given the broader market volatility, he said active management can take advantage of classic market factors such as momentum, value and quality. He is also keen on diversifying by size, and looks to add small and mid-cap exposure, saying lower interest rates should give smaller companies a tailwind. Factors will separate the winners and the losers in sectors such as healthcare, financials, energy and materials, he said, “because not all companies are equal even though they are in the same sector.”
With the Fed cutting rates, a weaker dollar continues to make international investing appealing in both developed and emerging markets, advisors say, and valuations are still attractive. Conners said even with this year’s gains in developed international markets, he still believes Western Europe is “a great place to invest.”
Emerging markets could have a lot of growth potential, but Conners advocates using mutual funds or exchange-traded funds to get exposure rather than picking stocks since it’s difficult for most advisors to do the research necessary. In the equities sleeve, he allocates between 10% and 15% toward international for both developed and emerging markets.
Harris also likes developed and emerging markets. How much he devotes to foreign stocks depends on the client, but for someone with a moderate risk tolerance, he’ll allocate 25% of the equities’ portion to non-U.S. companies.
Some advisors are turning cautious on private credit after its popularity for the past few years. Recent headlines such as First Brands’ sudden bankruptcy have some market-watchers concerned that underwriting standards may have slipped as the market has grown rapidly. Jason Blackwell, chief investment strategist at Focus Partners Wealth, said the issues with private credit are likely idiosyncratic and not pervasive, but it’s another reminder that diversification and manager selection matter.
“The golden era may not be over, but it is unlikely to be a free ride from here,” he said.
Although Harris emphasizes broad portfolio diversification, he said he shies away from alternatives in general, whether private equity, private credit or hedge funds. There are many reasons why he doesn’t incorporate alternatives, but the biggest is the long lockups. “We think it’s the rare retail investor who should be locking up any of their money,” he said.
‘Tax the Season. Two macroeconomic phenomena could affect markets in 2026, Blackwell said. First, the benefits of the new tax law passed by Congress in the summer should hit taxpayers’ bank accounts during the 2025 tax filing season. Consensus estimates suggest people may receive more than $50 billion in refunds. “That is a 44% increase over 2025 and could give consumption a timely boost in the first quarter,” he said.
On the flip side, he notes that midterm elections are in 2026, and historically, the second year of a four-term presidential term has delivered the deepest market correction. There is plenty to worry about, including taxes, spending, trade policy and AI regulation, but he points out that history shows that recoveries following these corrections are just as robust. “Long-term investors who can see through the political fog have usually been well rewarded,” he said.
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