Volatility or Opportunity? Where Smart Money is Moving Next

Archive edition · Market data and company circumstances reflect 8 March 2025, when this newsletter was sent.

Micro Trends, Major Gains: How Active Managers Stay Ahead

If 2024 taught investors one thing, it’s that broad market exposure alone isn’t enough. The year was defined by one of the highest levels of return dispersion in the S&P 500, proving that individual stock selection was the real driver of success.

While passive investors saw mixed results, those who identified strong businesses and avoided weak ones reaped the rewards. Now, in 2025, the same trends appear set to continue.

With inflation, interest rates, and global economic shifts playing out unevenly across sectors, not all stocks will move together. Active managers who focus on deep research, fundamentals, and market trends will be best positioned to thrive in this evolving landscape.

The Case for a Micro-Driven Market

S&P 500 return dispersion continued to rise in 2024.

Return dispersion in 2024 soared to 70 percentage points (pp), marking the highest level outside of recessionary periods since 2007. This rise has been fueled by low stock correlations and elevated single-stock volatility, both of which have created favorable conditions for stock pickers.

With six out of 11 sectors demonstrating above-average return dispersion, the market has provided ample room for outperformance through strategic active management.

In the last six months alone, 74% of the typical S&P 500 stock's returns have been attributed to company-specific factors rather than broader macroeconomic trends.

This is a notable increase from the historical average of 58% over the past two decades. Such an environment underscores the significance of fundamental analysis and the ability to discern winning stocks based on their individual merits rather than external economic forces.

Drivers of the Micro-Driven Market in 2025

Three key factors contribute to the ongoing micro-driven nature of the market:

A Strong Economic Backdrop

Goldman Sachs’ economic forecasts project a healthy growth environment for 2025. Economic expansion historically correlates with higher stock dispersion, as stronger earnings growth in certain industries can set them apart from underperforming peers.

The stability of growth also reduces the influence of macroeconomic shocks, allowing individual company fundamentals to dictate price movements.

The Continued Rise of Artificial Intelligence (AI)

Thematic investment trends such as AI development and adoption are driving differentiation among stocks. Companies that successfully integrate AI into their operations stand to gain a significant competitive edge, while those lagging behind may struggle.

AI’s transformative potential has created a wide gulf between winners and losers in various sectors, further enhancing stock return dispersion.

Elevated Policy Uncertainty

Political and economic policy debates surrounding trade, taxation, and fiscal matters remain a wildcard. As governments around the world introduce new policies, businesses are left to navigate shifting regulatory environments. The Economic Policy Uncertainty Index surged to 496 at the end of January 2025, one of its highest levels since the Covid-19 pandemic.

Historically, elevated policy uncertainty has been closely tied to higher levels of return dispersion, as investors attempt to assess how different regulations will impact individual companies.

Where Are the Biggest Opportunities?

Analyzing return dispersion at the sector level can provide further insights into where active managers should concentrate their efforts.

The highest return dispersion in 2024 was observed in Information Technology (XLK), where it reached an impressive 106 pp. This was followed closely by Consumer Discretionary (XLY) and Communication Services (XLC), sectors that have benefited from rapid innovation and shifting consumer behaviors.

Conversely, Real Estate (XLRE) experienced the lowest return dispersion at 39 pp, suggesting limited alpha opportunities for stock pickers within this sector. Utilities (XLU), despite its typically defensive nature, exhibited extremely high dispersion, ranking in the 98th percentile relative to historical trends. Meanwhile, Health Care (XLV) saw relatively low dispersion, placing in the 30th percentile.

Given these findings, stock pickers should focus on the Consumer Discretionary (XLY), Information Technology (XLK), and Communication Services (XLC) sectors, where dispersion scores remain high, as per Goldman Sachs. These sectors present the greatest potential for generating alpha through company-specific insights and strategic positioning.

Key Indicators for Stock Pickers

S&P 500 single-stock and overall market volatility as of February 13, 2025.

Another major contributor to the current investment environment is the elevated level of single-stock volatility relative to overall index volatility.

Over the past three months, the average S&P 500 (SPX) stock has exhibited more than twice the volatility of the aggregate index (1.7% vs. 0.8%). The persistence of this dynamic suggests continued opportunities for stock selection based on fundamental differentiation.

Additionally, realized average S&P 500 stock correlation has remained historically low, ranking in the 6th percentile relative to the past 20 years. When stocks exhibit low correlation with each other, individual price movements become more influenced by company-specific factors rather than broad market trends. This benefits active managers who can identify companies with strong fundamentals and unique growth catalysts.

What This Means for Investors?

As we progress through 2025, the micro-driven market structure presents both significant challenges and compelling opportunities for investors. With return dispersion at elevated levels and stock correlations remaining low, the environment is increasingly favorable for active management to outperform passive strategies.

Investors seeking to capitalize on these trends should focus on high-dispersion sectors such as Information Technology (XLK), Consumer Discretionary (XLY), and Communication Services (XLC)—areas where company-specific insights can unlock substantial alpha. Additionally, thematic investments in AI, policy-sensitive sectors, and merger & acquisition candidates present further opportunities for outperformance.

Success in this environment will depend on the ability to differentiate winners from losers. Those who can navigate policy uncertainty, identify companies with strong growth potential, and leverage sector-specific tailwinds will be best positioned to thrive.

Disclaimer: This newsletter was written as of February 13, 2025, and is being sent on March 8, 2025. Market conditions, prices, and other relevant data may have changed since the original publication date.

Archive note

This article preserves the analysis in our weekly newsletter sent 8 March 2025. Market prices, forecasts and company circumstances reflect the time of publication and may have changed.

This material is general information, not personal financial advice or a recommendation to trade. Investing and trading involve risk, including loss of capital.