Daniel Nilsson, Senior Portfolio Manager at Isio, reflects on 250 years of American independence, market concentration and the investment case for US small caps: “At Isio, we believe the investment case for the United States remains fundamentally strong, underpinned by structural innovation, world-leading corporate profitability and exceptionally deep capital markets.
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That said, the picture is more nuanced than in previous cycles. The S&P 500 currently trades on a forward P/E of around 22, well above its 30-year average of 16.2. This premium reflects the exceptional earnings power of dominant US franchises and the outsized contribution of high-growth technology companies. While headline valuations look stretched, the dispersion beneath the surface is striking, mega-cap tech names command elevated multiples, but many small and mid-cap companies are trading at meaningful discounts to their historical norms.
"The dominance of mega-caps presents both opportunity and risk. These companies benefit from scale, network effects and formidable balance sheets, but concentration also increases vulnerability to regulatory shifts and style reversals. As of mid-2026, the top 10 stocks account for roughly 40% of the S&P's total weight, higher than during the dot-com era or the Nifty Fifty period. This narrow leadership has supported performance, but it also means a large portion of the US equity market, particularly small caps, has been left behind.
"At Isio, we continue to see a compelling case for small caps. They are domestically focused, more sensitive to falling interest rates and typically benefit earlier in economic recoveries. Many have already undergone significant valuation compression, and earnings expectations are comparatively modest. If the US economy continues to normalise, moderating inflation, stabilising growth and potentially easing monetary policy, small caps could benefit disproportionately.
"Long-term performance trends still favour the US. Strong innovation cycles and superior earnings growth have driven persistent outperformance versus most developed markets. The IPO pipeline reinforces this strength: in 2025 the US saw 216 IPOs, up from 176 the year before, with proceeds rising to $47.4 billion.
"While the US is likely to remain a global leader, we continue to advocate a globally diversified approach. Our equity allocation at Isio is designed to reflect the investable universe, and we do not see a strong rationale for moving significantly away from a broad market-cap benchmark".
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