Well, the 10 biggest companies in the S&P 500 making up about 40% of the index's total value, and in the Russell 1000, the top 10 companies account for 37% of the market, the highest level in over 40 years.
The Mag 7 leading the S&P 500, while seven of those 10 Russell companies are tech names as these.
AI giants continue to dominate.
Fears over an AI bubble are popping up.
Well, joining me to weigh in is Heather Brilliant, CEO of Diamond Hill.
Heather, great to have you here.
Thank you so much for joining me.
Thanks for having me.
Well, one thing we've been hearing as AI names continue to skyrocket is concentration risks.
So tell us how this affects the index.
Well, it really means that investors who are investing in index-based strategies are probably not as diversified as they think they are because with 37 to 40% of these indexes being driven by the top 10 names and most of those top 10 names really being in the same industry.
Or a play on the same theme, let's say it really means that investors are quite exposed if we are overspending on AICAP X right now and perhaps don't see the return on investment that people are investing expecting these companies to benefit from.
And Heather, 2025 has been quite the year for the broader equity averages, and in addition to that, we do see other assets skyrocket as well, including some of the commodity names, in particular gold as well as silver.
So tell me what you're seeing in terms of active portfolios and tell us what's different from passive indexes.
Yeah, I mean, I think the biggest difference is we're really focused on a valuation disciplined approach to finding companies that generate excess returns on cash that exceed the cost of capital or the cost for them to do business.
And so when you analyze the market that way, you really get a very diverse perspective across the economy and across different industries and sectors, and I think that gives us an opportunity to add value for our clients' portfolios.
And now that we're in the final quarter of 2025, when we take a look at performance for the major stock averages and even a Russell, we are looking at year to date positive gains here.
So small and micro cap companies, where are the opportunities and what are the risks?
So small and micro cap companies are very underfollowed, and so even though the number of companies that is publicly.
Traded has declined materially over the last 20 years.
The number of analysts covering those companies has also declined very materially, and so that means it's generally small and micro cab companies that don't get coverage.
And so there's lots of opportunities where investors just don't fully understand the potential of these businesses or their ability to generate cash in the future.
So we really focus on finding some opportunities in that small and micro cap space.
And another thing we're paying close attention to is the US economy.
Of course, the US government is in a shutdown, so we don't have access to the usual data points that we're used to, but when it comes to consumer oriented asset-backed securities, what do you see?
Well, we're really seeing that some of the risks that the economy could be weakening are starting to be priced in in that asset class, and that's really one of the only areas we're seeing it priced in because there's still so much exuberance in the stock market and in the corporate bond market.
And so it's something that we're really watching to see if that is some kind of an indicator or trend that the economic weakness is starting to affect more parts of the economy.
And finally, Heather, before I let you go, we continue to monitor monetary policy in addition to the economic data points here as well as what's happening on the regulatory landscape.
But when it comes to the end of this year as well as the upcoming year, hard to believe, but about 80 days to go until the new year.
So what matters when it comes to investment strategies and why?
I think the most important thing is to really understand the risks of the underlying holdings in your portfolio, and I feel like we've gotten away from that right now where everyone is kind of in a FOMO mentality of not wanting to miss out on the Nvidias and Facebooks and Googles of the world.
And what we really need to understand is there are a lot of risks on the horizon both for those companies in particular with the AIAPX spending as I was talking about before, but also from a macroeconomic and political standpoint where there's just a lot of uncertainty right now.
And finally, before I let you go, you mentioned that word diversification, and we always know that hindsight is 2020, but when we zoom out and look at this year, and of course if you've seen different market cycles, different policy cycles, it gives you an indication of where and how to diversify.
But when we're seeing such exuberance in the marketplace, not just in equities, but also other areas of the market as well, how are you digesting all of this?
Well, it's interesting because I think you can have a perfectly well diversified portfolio with only 20 or so holdings.
In fact, the data shows that the benefits of diversification start declining when you exceed 20 holdings.
But the reason why you still are not getting a very diversified set of exposures with the indexes is because the top holdings are so big and they are so specifically in technology and AI oriented industries.
So but if you had a diversified portfolio of 20 or 30 stocks, that's actually plenty in order to get a really broad understanding of the economy and have more diversified exposures.
Well, Heather, it was great having you on the show.
Thank you so much for joining me and thank you so much for sharing all of your insights today.
Thanks for having me.
Thank you.
