As 2025 approaches, investors worldwide are bracing for heightened risk tied to one of the most powerful forces in global finance — the U.S. stock market. With the U.S. market now accounting for 67% of the MSCI All-Country World Index, its dominance is hard to ignore. But what happens when the world’s largest market becomes the single point of failure for portfolios across the globe?
For George Kailas, CEO of Prospero.ai, the answer lies in embracing a philosophy that goes beyond market timing or quick-fix strategies. “Risk is non-negotiable when it comes to investing in the stock market,” says Kailas. “However, it is possible to effectively manage risk when investing. There are two words I want you to remember when looking to taper your risk levels: balance and discipline.”
These words carry weight in the context of 2025’s projected market outlook. Despite two consecutive years of 20% gains for U.S. equities, the sheer concentration of wealth in a handful of high-performing companies like Apple, Microsoft, and Nvidia has raised alarms. The “Magnificent 7” stocks alone — Apple, Nvidia, Microsoft, Amazon, Meta, Tesla, and Alphabet — now make up over 20% of the global stock market’s total value.
Historically, diversification has been the cornerstone of sound investment strategy. The concept is simple: spread your risk across multiple assets so that one sector’s collapse doesn’t tank your entire portfolio. But with the U.S. market’s growing influence on global indices, achieving true diversification is becoming increasingly difficult.
As the head of a large pension fund recently admitted to Reuters Breakingviews, “We are actively not letting our exposure to the United States get too large,” but added that doing so had been “painful” given the returns U.S. stocks have provided. This dilemma highlights the issue: while U.S. stocks have been outperforming, the weight of their dominance has forced even international investors to increase their exposure to American markets — a move that could backfire in the face of volatility.
For Kailas, managing this risk requires a blend of balance and discipline. “Balance presents itself in diversifying your investment portfolio. Spread your money along a variety of sectors and companies to ensure one loss doesn’t have a major consequence on your money and other investments,” he explains.
Yet diversification isn’t just about geography. Diversifying across asset classes — like bonds, commodities, and alternative investments — is equally crucial, especially as the Federal Reserve is expected to continue cutting interest rates. Analysts at UBS predict that when the Federal Reserve cuts rates outside of a recession, U.S. equities typically rise by 18% over the next 12 months. While this may sound like good news, it also increases dependence on U.S. equities.
U.S. equities are currently trading at a price-to-earnings (P/E) ratio of 28, significantly higher than the 18 times historical earnings for international stocks tracked by the S&P World ex-U.S. Index. This valuation gap raises the risk of slower returns ahead. In fact, Goldman Sachs predicts that the S&P 500 will produce an annualized gain of just 3% over the next decade, barely enough to outpace inflation.
Kailas advises against chasing returns or overreacting to short-term swings. “Discipline requires you to stay on top of market trends and remain informed about the state of the market throughout the days,” he says. This means ignoring the noise of headlines and remaining focused on long-term goals. “Discipline also presents itself in remaining objective. Avoid making emotion-based or rash decisions in the stock market because of short-term ticks.”
This advice is particularly relevant now, as 2025 shapes up to be a pivotal year for the S&P 500. With forecasts suggesting gains of 7% to 15%, many investors are tempted to “ride the wave.” But that wave is riding on the backs of a small number of companies, making the market more fragile than it appears.
Just as the “Nifty Fifty” stocks of the 1970s captured investor attention, today’s “Magnificent 7” command disproportionate influence on index performance. If one of these companies faces a regulatory issue or fails to meet growth expectations, the ripple effect could impact every investor whose portfolio is passively tied to the S&P 500 or MSCI All-Country World Index.
When markets are rising, it’s easy to get caught up in the euphoria of gains. But for Kailas, discipline is the key to sustainable growth. His advice echoes the principles of value investors like Warren Buffett, who famously said, “Be fearful when others are greedy, and greedy when others are fearful.”
For Kailas, discipline means taking a step back to evaluate how current investments align with long-term goals. “Combine balance and discipline by regularly assessing your investment decisions and seeing how they align with the current market,” he explains. This might mean trimming exposure to U.S. tech stocks and adding investments in other regions or asset classes.
It’s also about not getting sucked into the “next big thing.” If AI hype has taught investors anything, it’s that overexposure to a single theme can lead to significant losses if that narrative shifts. This is especially true now that large-cap tech stocks are commanding such a large share of the global market.
U.S. stock market dominance poses a new kind of risk for investors in 2025. Unlike past market cycles, where diversification provided a natural hedge, today’s market concentration has made it more difficult for investors to spread their bets. But as Kailas points out, balance and discipline remain the keys to weathering uncertainty.
“Above all else, make sure your strategies and investments continue to fulfill your financial goals,” he advises. This approach could mean making small, consistent adjustments — not sudden overhauls — to keep your risk in check.
Here are three steps to help manage risk as 2025 approaches:
- Diversify your portfolio: Look beyond the U.S. stock market for opportunities in international equities, bonds, and alternative investments.
- Stay disciplined: Avoid emotional decisions based on daily market swings. If a stock drops 5% in a day, don’t panic-sell. Stay focused on long-term goals.
- Keep an eye on concentration: Watch for “hidden risk” in portfolios tied to ETFs or indexes that are heavily concentrated in large-cap tech stocks.
With U.S. stocks on pace for a third consecutive year of 20%+ returns, investors have every reason to remain bullish. But history offers a cautionary tale. The S&P 500 has only achieved three consecutive years of 20% returns once before — during the dotcom boom of the late 1990s. What followed, of course, was a sharp correction.
This doesn’t mean a market crash is imminent, but it does underscore the importance of managing risk. Overconcentration in U.S. equities could leave investors exposed to shocks from a few companies.
As Kailas puts it, “Risk is non-negotiable, but it can be managed.” His philosophy is a reminder that while it’s impossible to avoid risk entirely, investors have the power to shape how much of it they take on. Balance and discipline may not grab headlines, but they can protect portfolios when euphoria inevitably gives way to reality.
With 2025 on the horizon, investors face an uncomfortable but crucial question: Are they relying too heavily on the U.S. stock market’s ability to defy gravity? If the answer is yes, then it’s time to take a page from Kailas’s playbook — and remember the power of balance and discipline.