Goldman Sachs: The monopoly of mega-cap tech stocks is collapsing, and a turning point in market concentration has emerged after 15 years.

The highly concentrated pattern of the U.S. stock market, which has persisted for over fifteen years, is collapsing. Peter Oppenheimer, Chief Global Equity Strategist at Goldman Sachs, pointed out in a recent report that global stock markets are undergoing a healthy normalization process, with market returns diversifying simultaneously across geographical and sectoral dimensions. The value of diversified allocations is significantly rebounding. Since early 2025, this round of "great dispersion" has accelerated noticeably. The U.S. stock market has performed the weakest among major regions, while Japan, the Asia-Pacific, and emerging markets have recorded the strongest gains in local currency terms. At the same time, massive capital expenditures from hyperscale tech companies continue to erode their free cash flow yields, leading to valuations in the tech sector being adjusted downward, while spillover effects boost growth prospects and valuations in traditional sectors like industrials. In the global strategy report titled "Momentum, Rotation and Value in Growth," Oppenheimer emphasized that the driving force behind this market rotation comes from earnings fundamentals, rather than valuation expansion or declining interest rates. He believes that after over a decade of extreme concentration in market capitalization and performance, a structural turning point is emerging, and opportunities for investors to achieve returns from truly diversified allocations are increasing. Valuations in the tech sector are under pressure, and the advantages in free cash flow are narrowing. In the over ten years following the financial crisis, the tech sector leveraged its asset-light model, the explosive demand for cloud computing and software, and valuation premiums in a zero interest rate environment to achieve a sustained rise in profit margins and return on equity (ROE), becoming the core allocation direction for global capital. However, the emergence of ChatGPT has ignited a capital expenditure race among hyperscale tech companies. Oppenheimer pointed out that this capital expenditure supercycle is fundamentally changing the financial characteristics of the tech sectormassive investments continuously erode their free cash flow, forcing the relevant companies to turn to debt and equity markets for financing. Measured by free cash flow yields, the dominance of the U.S. stock market, led by hyperscale tech stocks, over value-oriented markets in Europe has significantly narrowed, providing fundamental support for the recent performance rotation. Meanwhile, higher government debt, ongoing inflationary pressures, and increased bond supply have collectively raised capital costs, making profit growth the core driving force of stock market returns. Earnings-driven rotation, traditional sectors usher in revaluation. It is noteworthy that this round of market dispersion is not driven by valuation bubbles or loose monetary policies but is based on solid earnings growth. Oppenheimer emphasized that not only are earnings themselves showing strong performance, but the direction of earnings expectations revisions is also persistently upward, providing double validation for the fundamentals supporting the stock market. The large-scale capital expenditures by hyperscale tech companies and semiconductor firms, combined with increased fiscal spending by governments for energy security, critical infrastructure, and national defense, have jointly spawned a capital expenditure supercycle. The spillover effects of this cycle are reactivating long-ignored traditional sectors, with substantial boosts to the growth prospects and valuations of sectors like industrials. At the national level, the overall ROE across regions remains high, and stock correlation is declining. As the leading sectors in the market continue to rotate, alpha opportunities are rising. Oppenheimer believes that although the overall P/E ratio of the U.S. stock market has decreased due to the drag from the tech sector, the U.S. market remains the most attractive globally from an ROE perspective. The inflection point of concentration has been established, and the value of diversified allocations is returning. Goldman Sachs believes that the decline in stock correlations, along with the rapid collapse of recent momentum strategies, is accelerating the switching of market leadership, creating a more favorable environment for investors to selectively create value in growth areas. Oppenheimer's key judgment is that, after more than a decade of extreme concentration in both market capitalization and performance, global stock markets are experiencing a healthy normalization, and diversified allocations are once again generating real returns. He expects this trend to continue to evolve. For investors, this means that the cost-performance ratio of a strategy heavily relying on U.S. hyperscale tech stocks is declining, while the logic of balanced allocation across regions and sectors is being re-established. This article is reproduced from "Wall Street Insight," author: Zhao Ying; GMTEight editor: Chen Siyu.