Could 2025 be a vintage year for stock pickers?
Elevated valuation multiples, converging earnings trends between the “Magnificent 7” and the rest of the global equity market, as well as geopolitical uncertainty may add to sources of market inefficiencies that stock pickers can exploit. Leading Schroders' equity investors, Lukas Kamblevicius, Alex Tedder and Nick Kirrage, look at how they are exploiting the market efficiencies they see before them.
1) Three reasons for choosing active management in 2025
Lukas Kamblevicius, Co-Head of the QEP Investment Team: We all know that passive investing is a cost-effective way to gain exposure to equity markets. It tends to work well in a calm, trend-driven market environment. If anything, at the current juncture of markets, investors might want to consider an active approach. Valuation multiples are quite high across all regions, primarily in the US, but equally so in some other pockets of the world. Meanwhile, index concentration is increasing across multiple regions and volatility has picked up so far in 2025. Combining all those three components together, one would advocate that risk management and an ability to tilt away from more concentrated, more valuation stretched pockets to other portions of the market could be prudent. Looking ahead, we think an active approach will be required to navigate these risks.
US has driven market concentration to a four-decade high – but the US market is still not unusually concentrated by global standards
2) The Mag 7 are facing short-term risks
Alex Tedder, Chief Investment Officer, Equities: The Mag 7 are not a homogenous group; each operate very differently, have different product sets and different priorities. Microsoft is not Apple or Amazon; Google isn’t Meta; Nvidia isn’t Tesla. But the Mag 7 do share one common denominator, which is artificial intelligence (AI). They share a common interest in advancing their platforms through the deployment of generative AI models – essentially revolutionising the process of interaction between humans and computers. Optimism about the implications of this revolution has significantly influenced their stock prices, providing a common performance driver despite the variations in their respective businesses.
At this point the key question is, are investors ahead of their skis? Are they too excited about the AI theme and not thinking about the reality of translating new technology into hard dollars? It's relevant because doubts are creeping in. The doubts are focused on the idea that these companies are spending a ton on AI, and yet the short-term revenue benefit and profit benefit is actually very limited. There is a legitimate concern here. The structural potential from AI is clearly enormous, but actually in the short term, I suspect there'll be major disappointment at some points. New technologies rarely deploy in a straight line: they take time to build, and there are inevitably speed bumps along the way. I think that may be where we are now. A period of consolidation, and possibly some real disappointment later this year if demand for AI infrastructure (semiconductors, network equipment) begins to weaken.
3) Concentrated markets – opportunities and challenges
Alex Tedder: I have had some of the big tech names, purely because of conviction in what they do, in the business models and in their ability to sustain growth for quite long periods of time. This has played out quite nicely, and from a style standpoint the environment has helped me as these companies have grown very large. Can that environment continue? Based on history, almost certainly not. When you get to this degree of concentration, which currently is more than 30 per cent of the US market represented by a handful of stocks, historically the market has always broadened out. Those very large companies, as a group, have done relatively less well. Some of them may continue to power ahead, but the law of large numbers dictates that others will struggle to sustain growth and may even begin to decline. I think we're about to come into that phase. Given that many areas of the equity market have been neglected amidst the euphoria around the AI revolution, a broadening out is an opportunity for active managers.
4) The value perspective on the AI theme
Nick Kirrage, Head of the Global Value Team: I think AI is going to become endemic, and as it gets more and more powerful, it's going to become a bigger part of our lives. But alongside those huge leaps, you do get the huge hype. Trying to separate those things, I think, is very important. I think about this last year, when the hype around Nvidia was at its peak. As a value investor, we wouldn't have bought Nvidia at those kind of levels and we try and find other ways to make those returns. The way that we did it last year was by buying a stock called Hon Hai, otherwise known as Foxconn, and they are one of the largest outsourced manufacturers of Nvidia's chips. They so have benefited from Nvidia’s tailwind but was very cheap and very left behind. Can we find ways to exploit some of these trends? That's what we're thinking about.