There is reason to be nervous about U.S. stocks, despite their outsized performance in recent years.Michael M. Santiago/Getty Images
It is hard to argue with the success of the U.S. stock market in recent years, but let me try.
As the chart below shows, $10,000 invested in U.S. stocks at the start of 2011 would have grown to $93,000 as of Aug. 29, 2025. (This is based on the MSCI USA index, which has a long-term performance very similar to that of the S&P 500. I used MSCI for all the other indexes. I wanted the comparisons to be direct and consistent.)
That equates to a compounded annual return of 16.1 per cent. No other region was even close: EAFE stocks – companies in 21 countries in Europe, Australasia and the Far East (East Asia) – returned 10 per cent a year, Canada 9.1 per cent, Europe 6.8 per cent and emerging markets a mere 4.7 per cent.
Nevertheless, there is reason to be nervous about U.S. stocks. Their outsized performance in recent years is largely attributable to just seven stocks in the S&P 500, commonly known as the Magnificent 7 (Alphabet GOOG-T, Amazon AMZN-T, Apple AAPL-T, Meta META-Q, Microsoft MSFT-T, Nvidia NVDA-T and Tesla TSLA-T).
The combined value of these seven companies has grown to 35 per cent of the entire market cap of the S&P 500. We have seen this type of concentration in the past, and it has rarely ended well.
The 1970s version of the Magnificent 7 was the Nifty 50. It produced some outstanding gains in 1971 and 1972 but ended with one of the biggest stock market crashes of the 20th century, in 1973 and 1974.
A more recent example was the dot-com bubble, which saw the Nasdaq index soar from 1,000 in 1995 to 5,000 in 2000, then plunge more than 76 per cent by October, 2002.
We even have a Canadian example: Northern Telecom once accounted for about 35 per cent of the market cap of the entire Toronto Stock Exchange 300 Composite Index, and we know how that ended.
The rise of the Magnificent 7 may or may not be a bubble. The only certainty is that the gains of the past 15 years cannot be duplicated over the next 15 years. Retirees with exposure to U.S. stocks will be especially anxious to avoid a loss that would decimate their savings.
Assuming they don’t want to change their overall equity/bond asset mix, here are some options for the U.S. equity portion of their portfolios:
1. Invest in a U.S. equity fund that minimizes the influence of the Magnificent 7 (check out the Defiance Large Cap Ex-Magnificent 7 Index ETF, XMAG).
2. Switch to a small-cap U.S. equity fund (there are several). Small caps have underperformed in recent years, but perhaps that means it is their time to shine.
3. Invest more in the other geographic regions shown in the chart. Again, they have underperformed in recent years, but that should mean less downside risk going forward.
Frederick Vettese is former chief actuary of Morneau Shepell and author of the PERC retirement calculator (perc-pro.ca)
