Indian high-net-worth individuals (HNIs) who view the S&P 500 as their primary route to global portfolio diversification may need to reassess their strategy, according to Karan Aggarwal, Co-founder and Chief Investment Officer (CIO) at Ametra PMS. Aggarwal argues that the benchmark US index has become increasingly concentrated in a handful of technology companies and now trades at high valuations, significantly reducing its historical role as a broadly diversified international investment.
S&P 500's Evolving Landscape
Historically, the United States market, with its diverse corporate base and global revenue streams, served as a reliable proxy for international investing. It also offered a relatively low correlation with Indian equities, making it an attractive option for portfolio diversification. However, Aggarwal notes that the current market environment is drastically different from the past, necessitating a more cautious approach.
Concentration Risk in US Technology Stocks
Aggarwal points out that the S&P 500 is currently trading at nearly 30 times earnings, with the technology sector now comprising over 40% of the index. This level of concentration, he warns, is reminiscent of the period leading up to the dot-com bubble. Rather than reducing portfolio risk, investors might be inadvertently increasing it through excessive exposure to a single market and a dominant theme, particularly the artificial intelligence (AI) investment boom.
The top 10 companies within the S&P 500 now account for more than 40% of its total market capitalization, a substantial increase from the historical average of 20% to 25%. Such heavy concentration amplifies company-specific and sector-specific risks, potentially leading to increased volatility if investor sentiment towards AI or large technology firms shifts.
Valuation Concerns and Future Growth Expectations
Beyond concentration, Aggarwal also highlights significant valuation concerns. He references several indicators, including market capitalization-to-GDP, market capitalization-to-money supply (M2), and price-to-earnings ratios, all of which are at or exceeding levels observed during the technology bubble of the early 2000s.
While some argue that today's technology companies boast stronger earnings than their dot-com era predecessors, Aggarwal cautions that current valuations already factor in exceptionally strong future growth. His estimates suggest that the S&P 500 would require annual earnings growth of approximately 16% through 2030 to justify its present levels, a figure significantly higher than the long-term historical average of about 7% since 1945.
Should earnings growth revert closer to its 10-year average of around 10%, Aggarwal estimates the S&P 500's fair value to be closer to 5,300, implying potential downside from current levels. A return to longer-term trends or a sharp earnings slowdown could result in even steeper corrections.
Expanding Beyond US-Centric Global Funds
Instead of narrowly focusing global exposure on the US, Aggarwal recommends constructing geographically diversified portfolios across a broader range of developed and emerging markets. He advocates for a greater emphasis on value-oriented opportunities rather than solely momentum-driven technology stocks.
Investors should also scrutinize the underlying holdings of international mutual funds and exchange-traded funds (ETFs). Many so-called global funds still allocate up to 70% of their assets to US equities. Similarly, some emerging market funds have substantial exposure to Taiwan and South Korea, where benchmark indices are also heavily concentrated in a few semiconductor and AI-related companies.
True Diversification: More Than Just Overseas Investing
Aggarwal emphasizes the crucial distinction between currency diversification, geographic diversification, and genuine portfolio diversification. Simply investing overseas does not automatically mitigate risk if the underlying portfolio remains concentrated in a single country, sector, or investment theme.
He suggests that certain diversification goals can be achieved through other asset classes. For instance, a modest allocation to gold can offer an effective hedge against currency depreciation and inflation, while debt investments can help moderate overall portfolio volatility. While international equities retain an important role, their allocations should be strategically designed to minimize country, sector, and thematic risks, rather than merely increasing foreign exposure.
Aggarwal concludes that the era of relying on a single US index for "lazy" global diversification is drawing to a close. For Indian HNIs, he believes a more comprehensive, valuation-conscious approach that spreads investments across multiple markets and sectors will likely foster a more resilient portfolio over the long term.