How to back the US but reduce Magnificent Seven risk
David Craik explains how investors concerned about concentration risk, but who still want to have large equity exposure to the US, can diversify their exposure.
31st March 2025 13:54
by David Craik from interactive investor

Confusion seems to be an apt word to describe the United States three months into the return of President Donald Trump. That’s confusion over its economic policy with tariffs imposed on a variety of products from metals to cars and alcohol on a range of countries from Canada, Mexico and China to the European Union.
There has also been confusion over the administration’s political and military strategy in both Ukraine and the Middle East.
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It has rocked investor and consumer confidence and stoked the fear of higher inflation as a result of tariff-induced price rises. The previously “exceptional” US stock markets are down as a result with the S&P 500 off -5% in the year-to-date and the Nasdaq Composite down over -10%.
Previously soaring technology stocks – the Magnificent Seven - have also suffered. Amazon.com Inc (NASDAQ:AMZN) is down -12% in the year to date (to 31 March 2025); NVIDIA Corp (NASDAQ:NVDA) is down -18%; Alphabet Inc Class A (NASDAQ:GOOGL) is down -18.1%; Apple Inc (NASDAQ:AAPL) is off -13%; Microsoft Corp (NASDAQ:MSFT) is down -10%, and Meta Platforms Inc Class A (NASDAQ:META) is down -1.5%.
Tesla Inc (NASDAQ:TSLA) is down -34% but that is largely down to the political baggage of chief executive Elon Musk’s close relationship with President Trump.
China has also played its part in bursting the Magnificent Seven bubble with EV competition puncturing Tesla’s sales and the emergence of low-cost AI group DeepSeek hitting the power of US tech leadership.
Investors dialling down US exposure
It has led to, according to LSEG Lipper data, global investors pulling $33.53 billion (£25.91 billion) from US equity funds during the week to 19 March. However, in another sign of that confusion, data from VandaTrack revealed that net inflows from retail investors into US equities and exchange-traded funds (ETFs) have come to $67 billion in 2025 to date, only down a small amount from the $71 billion in the final quarter of last year. Tesla and Nvidia are proving particularly popular with retail investors looking to buy the dip.
So, how should investors best play the new US market? Stick with the seven or look elsewhere for Stars and Stripes stocks?
“Since the early 2000s, the US share of the global equity market has grown significantly. The advent of AI introduced the ‘Magnificent Seven’ theme, highlighting leaders such as Nvidia and Microsoft, who have been key contributors,” said Prerna Bhalla, investment analyst at Forvis Mazars. “However, this year, enthusiasm for the Magnificent Seven has waned due to various factors, including their high valuations. There are several strategies available for investors seeking alternative ways to gain exposure to the US without being concentrated in the Magnificent Seven.”
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She highlighted the Dodge & Cox Worldwide US Stock fund, which follows a value-oriented investment philosophy. It focuses on long-term fundamentals and price inefficiencies to select undervalued stocks with strong growth potential. “For instance, from the Magnificent Seven, they have identified Meta Platforms as an undervalued stock with robust growth prospects, competitive advantages, and capable leadership, despite facing temporary economic challenges,” she said.
Cast nets wider
Investing in US small-cap stocks could also be a viable strategy, she added, to reduce concentration risk, particularly in portfolios heavily weighted towards large-cap US equities. Currently, US small-cap stocks are trading at attractive valuations compared to their larger counterparts, which might be considered a favourable entry point for diversification.
“Investors might consider an active fund. However, it’s important to be mindful of the potential risks associated with smaller companies,” she said.
Another option is to invest in an equal-weighted US equity tracker fund. This approach sees stocks typically rebalanced quarterly, ensuring no single company makes a significant contribution to returns, while still providing broad exposure to the US market.
Alex Watts, senior investment analyst at interactive investor, likes the Invesco S&P 500 Equal Weight ETF Acc GBP (LSE:SPEX), which provides equally weighted exposure to US stocks within the S&P 500.
“This weighting mechanism lessens the risk posed by the concentration of the conventional S&P 500 index in the largest few stocks and provides a more balanced exposure across sectors and market caps. Every stock in the index is weighted at 0.2%, regardless of how large or small the company is,” Watts said.
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Watts explained that entering 2025 US market-capitalisation weighted indices, which are tracked by many index funds and ETFs, had become very concentrated in mega-cap technology, which were trading at high valuations.
“As markets fell drastically in early March the year-to-date return of the S&P 500 as of early March stood at -7.9%. This was driven by a near -16% fall for US consumer discretionary stocks and a 13.6% fall in US technology stocks,” he said.
“However, more defensive sectors that had underperformed in prior years such as consumer staples, healthcare and utilities held up a fair bit better, being positive in January and February. There’s been no safe haven in more domestically focused small/mid-cap stocks either, as investors face the reality that US tariffs may drive up costs and reduce competitiveness of American businesses.”
Watts highlights the Neuberger Berman US Multi-Cap Opportunities fund, which is unconstrained in investing from large/mega-cap down to small-cap.
Watts explained: “While still able and willing to selectively invest in mega-cap stocks, the portfolio also houses businesses of varying scale and from a diverse and differentiated set of sectors to capitalise on the breadth of the US market. A focused portfolio of 30 to 40 holdings is constructed by conducting fundamental analysis, with an emphasis on cash flow and capital-allocation decisions.
“The portfolio’s differentiation from a stylistic, size and sector perspective means that the fund could well benefit from a normalisation of the breadth of market returns across a broader set of stocks.”
How fund managers are playing the US sell-off
James Harries, manager of STS Global Income & Growth Trust Ord (LSE:STS), said as conservative income-focused investors, he seeks to avoid exuberance as well as seeking to produce a balanced return between income and capital growth.
“We see this as a way for investors to avoid the extremes in both valuation and concentration-facing [investing] in the US equity market while maintaining exposure to the world’s biggest and best economy. We would highlight three companies that are core investments in our fund and which we think remain very attractive,” said Harries.
The first is Automatic Data Processing Inc (NASDAQ:ADP), which helps other businesses outsource the management of their HR, payroll, tax and benefits functions on behalf of employees.
“As the administration of these areas becomes more complex and the penalties for mismanagement increase, the impetus to outsource to a specialist provider increase. This provides the company with a long runway for growth while generating attractive margins and returns on capital,” Harries said.
The second is CME Group Inc Class A (NASDAQ:CME), which owns some of the largest futures contracts in the world. Harries notes: “There is a structural increase in the use of futures and options to manage portfolio risks. This is especially the case in a world of higher volatility and uncertainty.”
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Another stock he mentions is Philip Morris International Inc (NYSE:PM) due to its dominant premium heat-not-burn product IQOS. “It is a high-quality US income investment,” he said.
Richard de Lisle, lead manager at the VT De Lisle America fund – of which more than 50% of the holdings are small-cap – makes the case for being diversified away from the Magnificent Seven.
“The valuation gap is very high. Medium-sized and smaller stocks are cheap relative to these bigger companies and their own histories,” he said. “There are thousands of these companies in the US, so don’t run away! You should certainly be equal weighted as they have a lot of catching up to do.”
However, Ian Mortimer, portfolio manager at Guinness Global Investors, points out that tech stocks are still very high-quality companies with “very good pathways for growth and if the earnings come through people could revisit that [valuations]”.
He added: “Potentially, there is a buying opportunity there relative to where they were four months ago. It comes back to the investment horizon. Long term they can be attractive. But, for a stock or theme to underperform, it doesn’t have to do terribly. Market and price expectations just need to be less than they were.”
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Watts added: “Valuations across the group are very mixed, with Tesla and Nvidia still trading many multiples above Microsoft, Alphabet and Meta. It is not to say that investors should flatly give up on great companies that comprise the Magnificent Seven, but it may be prudent to invest based on individual merits, valuation and the potential of each company going forward and to consider diversifying also across the broader US market.
“While the future is unclear, the last few months have hinted that returns from the US market may be becoming increasingly diverse and less concentrated within stocks of a select few sectors and of the largest scale.”
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