When only a few Stocks Carry the Market: why Equal Weight alone is still not enough

• Study shows that, historically, high equity valuations have often been associated with lower subsequent real returns
• Elevated valuations coincide with pronounced market concentration: market-cap-weighted indices depend heavily on a small number of mega caps
• Equal weight reduces concentration risks but needs to be complemented by systematic quality and risk controls

Elevated corporate valuations, pronounced market concentration and the search for alternatives to traditional market-cap weighting are shaping the current equity market environment. The new Assenagon study analyses valuations and market concentration against the backdrop of historical market developments. Over the long term, the data points to a challenging return environment. Equal weight, meaning the equal weighting of all stocks within an equity basket, can significantly reduce concentration risks. If implemented indiscriminately, however, the approach can introduce new risks into the portfolio. In their study, Assenagon’s experts show how equal weighting can be implemented in a systematic and risk-aware manner.
 

What CAPE currently says about Equity Valuations

One useful reference point for putting the current market environment into historical context is the so-called CAPE. It relates the current price level to the average inflation-adjusted corporate earnings of the past ten years. This smooths cyclical fluctuations in earnings and makes CAPE a useful measure of long-term valuation levels. Historically, the higher the valuation level at the time of investment, the lower subsequent real returns have tended to be on average.

“The current CAPE of 41, as of June 2026, is not a short-term sell signal. It does, however, clearly illustrate how demanding the assumptions for future earnings growth and stable margins have become,” says Sebastian Schmider, Head of AI Solutions and Macro Analytics at Assenagon. “For investors, this is an important signal: high valuations tend to reduce expected subsequent returns and increase the dependence on ambitious growth expectations actually being met.”

The detailed data analysis can be found in the latest issue of Assenagon Equity Insights.
 

Why Market Concentration is becoming a Risk

In addition to valuations, the study highlights market concentration as a second key dimension. In broadly diversified markets, expectations are spread across many stocks. In highly concentrated markets, by contrast, they depend disproportionately on a small number of index heavyweights. Negative surprises at these companies can therefore have a stronger impact on overall performance.

Market-cap-weighted indices increasingly reflect the valuation and earnings expectations of a small number of large companies. Many of these index heavyweights have robust business models, high margins and strong market positions. As their weightings increase, however, investment outcomes become more dependent on their continued market leadership.
 

Why Equal Weight alone is not sufficient

One obvious response to high index concentration is equal weight. In equal-weighted indices, all index constituents are included with the same weighting. This significantly reduces the dominance of individual mega caps and tends to shift the portfolio towards smaller companies that are often more attractively valued.

However, the study cautions against a purely mechanical understanding of equal weight. Lower valuations can indicate fundamental attractiveness, but they may also be associated with weaker profitability, higher leverage or elevated business risks. Equal weight therefore reduces concentration and, generally, valuation levels, but can at the same time increase other factor and quality risks.

“Equal weight is a sensible starting point, but it is not a complete risk management framework,” says Daniel Jakubowski, Head of Equity Portfolio Management. “Investors seeking to reduce the dominance of large index heavyweights should also ensure that no unintended risks enter the portfolio via factor exposures.”
 

Implications for Investors: how a Value-Size Approach Manages Equity Risks

This is where a systematic value-size approach comes in. Moving away from market-cap weighting is not done mechanically. Companies are not equally weighted solely because they belong to an index. Instead, securities are selected and weighted deliberately according to desired value and size characteristics, while undesired quality and risk characteristics are limited.

The key point is therefore not simply to move away from market-cap weighting, but to combine this shift with systematic control of valuation, quality and risk characteristics. In an environment of high valuations and narrow market breadth, a managed value-size approach can represent a meaningful complement to traditional equity allocation.

Munich/Frankfurt, 11 June 2026