Is investing in the S&P 500 enough for global diversification? Here's what Ametra PMS says

Indian high-net-worth individuals (HNIs) looking to diversify their portfolios globally should avoid equating overseas investing with simply buying exposure to the S&P 500, according to Karan Aggarwal, Co-founder and Chief Investment Officer (CIO) at Ametra PMS. He believes the US benchmark index has become increasingly concentrated in a handful of technology companies, reducing its effectiveness as a true diversification tool.

Aggarwal noted that the S&P 500 has delivered nearly 800% returns in rupee terms over the past 15 years, making it the preferred global investment avenue for many Indian investors. However, he argued that the current market environment is markedly different from the past and warrants a more cautious approach.

S&P 500 concentration

"The S&P 500 is trading at nearly 30 times earnings, while the technology sector now accounts for more than 40% of the index, levels similar to those witnessed during the run-up to the dot-com bubble," he said. "Instead of reducing portfolio risk, investors may be adding concentration risk through excessive exposure to a single market and a single theme."

According to Aggarwal, global diversification is intended to reduce portfolio volatility by providing exposure to economies and sectors that do not move in tandem with domestic markets. Historically, the US served as a broad proxy for international investing because of its diversified corporate base, global revenue streams and relatively low correlation with Indian equities.

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He believes that argument has weakened in recent years as the S&P 500 has become increasingly dependent on a small group of mega-cap technology companies benefiting from the artificial intelligence (AI) investment boom. The top 10 companies now account for more than 40% of the index's total market capitalisation, significantly higher than the historical average of 20% to 25%.

Such concentration, he said, increases company-specific and sector-specific risks and could amplify volatility if sentiment towards AI or large technology firms weakens.

High valuations leave little margin of safety

Aggarwal also highlighted valuation concerns. He pointed to several indicators—including market capitalisation-to-GDP, market capitalisation-to-money supply (M2) and price-to-earnings ratios—which, according to him, are at or above levels seen during the technology bubble of the early 2000s.

While some investors argue that today's technology companies have stronger earnings than businesses during the dot-com era, Aggarwal said current valuations already assume exceptionally strong future growth. Based on his estimates, the S&P 500 would require annual earnings growth of around 16% through 2030 to justify current levels, compared with a long-term historical average of roughly 7% since 1945.

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He estimates that if earnings grow closer to their 10-year average of around 10%, the fair value of the S&P 500 would be about 5,300, implying downside from current levels. A return to the longer-term earnings growth trend would indicate an even lower fair value, while a sharp earnings slowdown similar to the early 2000s could result in significantly steeper corrections.

Look beyond US-centric global funds

Instead of concentrating global exposure in the US, Aggarwal recommends building geographically diversified portfolios across nearly 50 developed and emerging markets, with greater emphasis on value-oriented opportunities rather than momentum-driven technology stocks.

He also advised investors to carefully examine the underlying holdings of international mutual funds and exchange-traded funds (ETFs). Many global funds currently allocate close to 70% of their assets to US equities, while emerging market funds often have substantial exposure to Taiwan and South Korea, where benchmark indices are themselves heavily concentrated in a small number of semiconductor and AI-related companies.

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Diversification is more than overseas investing

According to Aggarwal, investors should distinguish between currency diversification, geographic diversification and actual portfolio diversification. Simply investing overseas does not automatically reduce risk if the underlying portfolio remains concentrated in one country, one sector or one investment theme.

He added that certain diversification objectives can be achieved through other asset classes. For instance, a modest allocation to gold may provide a more effective hedge against currency depreciation and inflation, while debt investments can help moderate overall portfolio volatility. International equities can still play an important role, he said, but allocations should be designed to minimise country, sector and thematic risks rather than merely increase foreign exposure.

Aggarwal concluded that the era of "lazy" global diversification through a single US index may be drawing to a close. For Indian HNIs, he believes a broader, valuation-conscious approach that spreads investments across multiple markets and sectors is likely to offer a more resilient portfolio over the long term.

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