Alec Murray explains why blending large caps with overlooked stocks may be the smarter US equity trade
Given the year’s geopolitical uncertainty so far, one would expect that institutional investors would be ditching or re-evaluating US equities. After all, the headwinds are stacking up: tariffs, geopolitical conflict, questions about Fed independence, and an AI spending boom that may or may not justify its price tag.
But Alec Murray, SVP, head of client portfolio management at Pioneer Investments, pushes back on the entire idea. He argues the economy entered the year on solid footing, supported by fiscal stimulus, the delayed impact of Fed rate cuts, and AI-related spending – all of which pointed to roughly 2.5 per cent GDP growth before the US-Iran conflict began.
“If you look at earnings estimates in the US, since the war started, they've actually continued to rise, not fall. Now, obviously, at some point, if oil prices remain high, GDP are likely to be impacted. But the US is a net exporter of energy product, so it's probably a safer place to invest than most of the rest of the world.”
Given the sheer weight of the US in global indices, Murray says the question isn’t whether to invest in US equities, but how. Notably, US equity markets have reached their highest level of concentration in history, with the Magnificent Seven, as they've become known, dominating the S&P 500 Index, which trades at 22x forward earnings.
While this valuation level is above average, Murray points out the that average US stock as represented by the S&P Equal Weighted index trades at roughly 16 times forward earnings – a level comparable to the MSCI EAFE Index, which are non-US stocks. The difference is that the equal weighted US universe is expected to deliver stronger earnings growth and profitability than non-US stocks at a similar price.
“We invest in non-US stocks and other portfolios; we like non-US stocks. We're not arguing that investors shouldn't invest in them. But what we're saying is that this is probably the best environment for active managers in 20 years, because you have increasing market breadth and reasonable valuations across much of the equity universe,” Murray emphasized. “We think there's a lot to be excited about if you can look through the near-term volatility, which is always hard to do.”
Murray sees the equal-weighted index as a useful benchmark for understanding what the average stock in the market looks like. To that end, Pioneer Investments suggests “a blended approach”: keeping exposure to large-cap companies that still have solid earnings prospects and reasonable valuations, while pairing that with select stocks outside the market leaders that have been overlooked and trade at lower valuations.
Meanwhile, Christine Tan, portfolio manager at Sun Life Global Investments separates the US exceptionalism debate into two distinct threads. The structural case, she argues, remains strong. US capital markets are the deepest, largest, and most liquid in the world, and the country remains home to the dominant technology companies.
The cyclical case is where she sees more room for pushback. Growth dynamics, fiscal policy, and relative valuations have all started to shift. And on a rate-of-change basis, global equities have started to look more competitive.
"You have started to see, especially starting last year, the rest of the world certainly starting to look better," she said. “US exceptionalism, as a sort of an investment thesis, is not broken. It is certainly being openly contested or debated.”
To that end, Tan is careful not to argue for an outright exit from mega-caps. She sees those companies as fundamentally strong businesses with durable earnings, high margins, deep moats, strong balance sheets, and the scale and liquidity institutional investors still need.
“Having said that, I think there's still a high level of recognition that these mega caps, especially the Magnificent Seven, are still a very large part of the S&P 500. It's about 35 per cent of the market cap as of right now. So there is that tracking error component that an institutional asset allocator that is much more sensitive to relative to benchmark performance has to be aware of. But the strategy for us, especially as an asset allocator, as a manager of a solution, but also when we're speaking to clients, is to diversify. Both within the S&P, but more importantly, geographically,” Tan added.
But what has changed, she believes, is how investors assess those firms. AI spending has surged, with announced US AI-related capital expenditure rising sharply, and that has started to reshape the financial profile of some large tech companies. The spending supports long-term growth and helps companies tied to AI infrastructure, such as utilities and other enablers.
Additionally, for the mega-caps footing the bill, free cash flow is coming under pressure and debt levels are beginning to rise. As a result, investors are no longer treating the group as a single trade. They are paying closer attention to monetization, return on investment, balance sheet strength, and cash flow quality.
She highlights Korea as a strong example, pointing to Samsung's position in the memory market. Memory is cyclical and currently in the early stages of an upcycle, with pricing power improving as manufacturers shift production toward higher-margin products used in AI infrastructure. It's a way to gain exposure to the same AI spending theme at a lower valuation, she noted.
"It doesn't mean that these are businesses that are no longer good but that's why you're seeing investors really start to differentiate,” Tan noted.
Similarly, rather than abandoning mega-caps, Murray sees value in owning the strongest of them while using active management to reach beyond the obvious names that dominate the index.
His point is that cap-weighted indices already contain themes such as AI and digital payments, but they do not necessarily emphasize the full range of businesses that stand to benefit from those trends. He suggests a smore active approach can do that by combining large-cap exposure with companies in areas such as industrials and infrastructure that benefit from second-order effects.
For example, he points to electrification. If AI adoption continues to rise, power demand may rise with it. That could create opportunities not just in technology, but in the utilities that generate electricity, the manufacturers that supply key equipment, and the engineering and construction firms that help build out capacity. In Murray’s view, many of these businesses are underrepresented in the index, which is why a blended strategy makes more sense than simply owning the market as it stands.
He believes that gives investors the best of both worlds. It allows them to maintain meaningful positions in the biggest stocks where that still makes sense, while also putting more capital into parts of the market that are underrepresented in traditional cap-weighted indices. He argues that this is a more practical way to invest in US equities than relying solely on either cap-weighted or equal-weighted exposure.
Outside the US, Murray sees selective opportunities in Europe. He’s constructive on European banks, arguing that the interest rate backdrop has become more supportive for the sector and that a number of those banks still trade at reasonable valuations.
“We also favour selectively European energy firms because there are firms there that have really strong exposure to natural gas. In an environment where natural gas is increasingly in short supply. And those stocks trade at more reasonable valuations than their US counterparts do,” Murray noted.
He also highlights European companies tied to infrastructure and defense spending, particularly in Germany, where higher spending commitments have created what he sees as a durable investment theme.
Beyond Europe, Murray says Korea also stands out as a diversification play, describing it as close to a developed market with several reasonably valued stocks, including banks. Overall, his preferred areas outside the US are fairly targeted rather than broad-based, with the strongest interest in energy, infrastructure, and financial services.
Murray also acknowledges that outperforming in US large-cap equities has been difficult for active managers over time. Success in that part of the market requires a highly disciplined process, and only a small number of firms have been able to do it consistently, he noted.
“If there's one thing that investors can do on their behalf as we continue through 2026 and beyond, it's diversifying that exposure by investing with an active manager. Because historically, those periods of concentration have not ended well for investors in passive indices,” said Murray. “And we don't think this time is going to be any different.”
