The extreme concentration of the US stock market, which has persisted for over 15 years, is beginning to unwind.

Goldman Sachs Chief Global Equity Strategist Peter Oppenheimer stated in a recent report that global equity markets are undergoing a healthy normalization process. Market returns are spreading out across both regions and sectors, significantly boosting the value of diversified portfolios.

Since the start of 2025, this trend of broad dispersion has accelerated notably. The US stock market has been the weakest performer among major regions, while markets in Japan, Asia-Pacific, and emerging economies have recorded the strongest gains in local currency terms. Meanwhile, massive capital expenditures by hyperscalers are steadily eroding their free cash flow yields, driving down valuations in the tech sector. The spillover effects, however, are boosting growth prospects and valuations for traditional industries like industrials.

In his global strategy report titled "Momentum, Rotation, and Value in Growth," Oppenheimer emphasized that the driving force behind this market rotation is fundamental earnings growth, not valuation expansion or lower interest rates. He believes that the extreme concentration of market capitalization and performance, which has lasted for over a decade, is now facing a structural shift. Investors are seeing increasing opportunities for returns from genuinely diversified portfolios.

Sector Valuation Under Pressure, Free Cash Flow Advantage Narrows

In the decade following the financial crisis, the tech sector became a core allocation for global capital. This was driven by its asset-light model, surging demand for cloud computing and software, and premium valuations supported by a zero-interest-rate environment, leading to sustained increases in profit margins and returns on equity.

However, the emergence of ChatGPT has ignited a capex race among megacap tech companies. Oppenheimer points out that this super-cycle of capital spending is fundamentally changing the financial profile of the tech sector. Large-scale investments are continuously eroding free cash flow, forcing these companies to turn to debt and equity markets for financing.

Measured by free cash flow yield, the advantage of the US stock market, dominated by hyperscalers, over value-oriented markets like Europe has narrowed significantly. This provides a fundamental basis for the recent rotation in relative performance. Additionally, higher government debt, persistent inflationary pressures, and increased bond supply are collectively raising the cost of capital, making earnings growth the primary driver of stock market returns.

Earnings-Driven Rotation Sparks Revaluation of Traditional Sectors

Notably, this market dispersion is not fueled by valuation bubbles or loose monetary policy but is built on solid earnings growth. Oppenheimer stresses that not only are earnings themselves strong, but the direction of earnings estimate revisions is also consistently upward, providing a double confirmation of fundamental support for the stock market.

The massive capital spending by hyperscalers and chip companies, combined with increased fiscal spending by governments for energy security, critical infrastructure, and national defense, is creating a capex super-cycle. The spillover effects of this cycle are reactivating long-neglected traditional sectors. The growth prospects and valuations of industries like industrials are seeing a significant boost.

On a national level, ROE across regions remains high, and stock correlations are declining. As the leading sectors of the market continue to rotate, alpha opportunities are rising. Oppenheimer believes that while the overall P/E ratio of the US market has declined due to tech sector weakness, it remains the most attractive market globally from an ROE perspective.

Concentration Peak Reached, Value of Diversification Returns

Goldman Sachs believes that declining stock correlations and the rapid unwinding of recent momentum strategies are accelerating the shift in market leadership. This creates a more favorable environment for investors to select value within growth areas.

Oppenheimer's core thesis is that after more than a decade of extreme concentration in both market capitalization and performance, global equity markets are undergoing a healthy normalization. Diversified portfolios are once again generating real returns. He expects this trend to continue evolving.

For investors, this means that the strategy of solely betting on US megacap tech stocks is becoming less profitable. The logic for a balanced allocation across different regions and sectors is being re-established.