Elevated Valuations, Concentrated Markets: Is Equal Weight the Way Out?

Against this backdrop, a current CAPE of around 41, as of June 2026, appears demanding. Valuation levels of this magnitude have historically been located well within the upper range of the observed distribution and have frequently coincided with below-average subsequent real returns. The regression line in Figure 1 also points to a more subdued long-term return environment at this valuation level.

This assessment should not be interpreted deterministically. The dispersion of observations shows that valuation alone does not provide a complete explanation. Earnings growth, interest rates, inflation, margins and investor positioning also influence actual outcomes. CAPE is therefore not a short-term timing signal, but rather a guidepost for long-term return expectations. For strategic equity allocation, this relationship nevertheless remains relevant: high valuations tend to reduce expected subsequent returns and increase the dependence on high expectations for growth and profitability actually being met.
 

Market concentration as a second dimension

What matters, however, is not only how highly the overall market is valued, but also across which companies the associated expectations are distributed. In a broadly diversified market, expectations rest on many stocks. In a highly concentrated market, by contrast, they are disproportionately tied to a small number of index heavyweights. Valuation alone therefore provides only an incomplete description of the current environment. It needs to be complemented by a second dimension: market concentration.

The colour coding of the observations in Figure 1 illustrates this second dimension. From a historical perspective, periods of high concentration often occurred in an environment of elevated valuations and tended to be associated with weaker long-term subsequent returns. The reason is the rising concentration risk within the portfolio. When a few large stocks account for a high share of the index, negative surprises at these companies have a stronger impact on overall performance.
 

Equal Weight as a way out?

For strategic investors, this does not imply avoiding equities altogether. Rather, the key question is which equity risks are embedded in the portfolio, which of them are still adequately rewarded, and whether the equity allocation can be structured more deliberately. This is where a systematic framework for assessing and managing equity risks becomes relevant.

One obvious response to high index concentration is Equal Weight. In this approach, all index constituents enter the index with the same weight. This significantly reduces the dominance of individual mega caps and tends to shift the portfolio towards smaller and often more attractively valued companies. However, a “naive” Equal Weight approach introduces new challenges. A lower valuation, for example, may indicate fundamental attractiveness, but it may also be associated with weaker profitability, higher leverage or elevated business risk. Equal Weight therefore reduces concentration and tends to lower valuations, but without adequate controls it can increase other factor and quality risks.

Figure 2 illustrates this issue using a global Equal Weight index. The index substantially reduces concentration and, as expected, results in a clear size tilt towards smaller companies. At the same time, however, it creates new and undesirable factor and quality characteristics, including significantly below-average profitability, higher leverage and a beta that fluctuates over time.
 

Assenagon Equity Framework: Systematic control instead of mechanical equal weighting

This is where the Assenagon Equity Framework comes in. It deliberately uses desired factor premia such as value and size to manage risks such as elevated valuations or market concentration, while maintaining a focus on other quality and risk dimensions. Profitability, leverage, momentum, idiosyncratic volatility and market risk are systematically controlled. The move away from market-capitalisation weighting is therefore not mechanical, but risk-aware. In concrete terms, companies are not equal-weighted solely because they belong to an index. Instead, selection and weighting are targeted along desired value and size characteristics, while undesirable quality and risk attributes are constrained.

The historical performance shown in Figure 3 indicates that such a structured approach can add value compared with simple equal weighting. Over the period under review, the selectively equal-weighted strategy generated a return of 127.6%, compared with 92.4% for the Equal Weight index — an outperformance of around 35 percentage points. Both approaches reduce the concentration risks of market-cap-weighted indices. The Value Size approach, however, allows investors to avoid undesirable side effects.
 

Implications for capital market investors

For investors, this means that passive equity exposure should be assessed more selectively in the current environment. Elevated valuation levels increase the dependence on future earnings growth and stable margins, while pronounced index concentration channels these expectations into a small number of large companies. As a result, a portfolio may appear broadly diversified in formal terms, but in practice be more strongly driven by individual business models, valuation multiples and market leadership positions than the number of holdings would suggest.

Equal weighting index constituents can reduce this concentration risk, but it does not automatically answer the question of which equity risks remain in the portfolio. The decisive factor is therefore not merely moving away from market-capitalisation weighting, but combining this shift with systematic control of valuation, quality and risk characteristics. In an environment of elevated valuations and narrow market breadth, a managed Value Size approach can therefore represent a meaningful complement to a traditional equity allocation.

Daniel Jakubowski, Sebastian Schmider