The Tyranny of the Index (February 2026)
The Capital Cycle is the official podcast that Marathon Asset Management (the London firm founded in 1986) launched in 2024, hosted by financial historian Edward Chancellor, who interviews Marathon's investors about each Global Investment Review letter — applying the firm's long-term, contrarian "capital cycle" supply-side approach.
In plain words
This report uses over 100 years of data to show that the US stock market is dangerously concentrated—the top 10 tech stocks now dominate the index, similar to the 1999 dot-com bubble. The author warns that past high returns won't continue because starting valuations are too high. For ordinary investors, the key isn't picking winners but avoiding overexposure to popular indexes. Instead, consider unloved hard assets like cement or mining, or non-tech stocks in emerging markets—they're cheaper and less risky. Worth reading because it uses history to remind you: the most crowded trades are often the most dangerous.
This report draws on data from the Global Investment Returns Yearbook to explore the long-term returns of U.S. stocks and the current concentration risk. Key takeaways: From 1900 to 2024, the real annualized return of U.S. stocks was 8.5%, but cyclical fluctuations were violent—over the 20 years end
Theme and Background
Drawing on the long-term historical data from the Global Investment Returns Yearbook, this chapter discusses the current abnormally high concentration of the US stock market and the recent return performance deviating from historical averages. The report focuses on "the tyranny of indices", i.e., market participants are systematically weakening portfolio diversification due to recency bias, the expansion of passive investing, and career risk for active managers.
Core Viewpoints
The author believes that the high returns of US stocks since the 2008 financial crisis cannot be simply extrapolated, but the market is doing the opposite. The current weight of the technology stock sector has surged to about 40%, seemingly unassailable, but its continuously soaring capital expenditures precisely suggest that disruption risk is rising. The report's core investment judgment is that starting valuation is more critical than projected growth rates; the author proposes an absolute return threshold of roughly mid-to-high single digits (in USD terms) and calls it the '9% Problem.' Counterintuitively, the author believes that the best way to outperform the index is to ignore the index itself — that is, through absolute-return-oriented capital cycle analysis, to find a portfolio that is completely different from the index composition.
Key Arguments & Data
| Indicator | Data |
|---|---|
| Real annualized return of US stocks (1900-2024) | 8.5% |
| 20-year real annualized return through 1999 | 10.5% |
| Real annualized return for the decade after 1999 (through 2010) | Negative |
| Years with returns exceeding 10% in the past 25 years | 14 years |
| Of which occurred after 2010 | 11 years |
| Tech sector weight in US equities (current) | ~40%, a 92-year high |
| Railroad stock weight in US equities (1900) | ~60%, now less than 1% |
| Proportion of "disappeared or shrunk" among companies listed in 1900 | ~80% |
| Top 10 stocks' contribution to total S&P 500 returns since 2020 | Over 55% |
| Of which, share of negative returns in 2022 | 63% |
Comparative Analysis: The report argues that while US stocks deliver high returns amid rising concentration, the equity risk premium in other global markets has instead been compressing rather than expanding. The chart shows that the P/E ratio of the MSCI ACWI ex-US index relative to the MSCI USA has been persistently declining (2010 to 2025), indicating that the valuation discount the market applies to non-US markets is widening, not narrowing.
Companies/Assets Involved
| Company/Asset | Role and Key Data | Direction/Judgment |
|---|---|---|
| Cemex (Mexican cement company) | Bought at approximately 60% of replacement cost; new supply likely triggered only when industry prices nearly double; represents a "chimney asset" | Bullish. Features positive asymmetric returns: achieving the minimum return threshold does not rely on extreme assumptions |
| Emerging Markets Fund (emerging market strategy) | Portfolio allocation characteristics: non-Asia regions account for half of capital; heavy-asset industries such as materials, industrials, real estate, energy, telecom, and financials constitute about 60%; stands in stark contrast to the MSCI Emerging Markets Index composition (80% Asia stocks, heavy on tech/internet/consumer) | Bullish on its investment logic. Believes the implied equity risk premium of the portfolio far exceeds that of the index, helping to solve the "9% problem" and avoid permanent capital loss |
| Top 10 stocks in the S&P 500 (especially tech stocks) | Concentration hits a 92-year high; capex surges (implying existing business models face disruption risk) | Cautious/bearish. Pricing implies an assumption of "not being disrupted," but history proves disruption is the norm |
Investment Implications
1. Do not extrapolate recent high US equity returns: Starting valuation, not growth expectations, is the key determinant of future returns. Current US equity valuations are at historical highs, posing significant equity duration risk.
2. Beware of passive exposure combined with concentration risk: Active management portfolios are increasingly converging with indices, creating "expensive beta plus negative alpha," providing the least diversification precisely when it is most needed.
3. Seek hard assets trading below replacement cost with genuine repricing potential: Examples include heavy-asset industries such as cement, mining, and telecommunications. Through modest reinvestment and dividend reinvestment, compound returns in the mid-to-high single digits can be achieved.
4. Globally diversify into non-tech sectors in emerging markets: The report specifically highlights materials, industrials, and energy stocks in regions such as Latin America and Eastern Europe, which offer higher margins of safety in terms of valuation and competitive landscape.
5. Act contrary to market consensus: Under the "tyranny" of tech stock dominance, deliberately ignoring index composition is a viable path to solving clients' absolute return challenges.