Concentration in US equity markets has reached levels that demand active portfolio monitoring, according to a senior portfolio manager at Victory Capital. Speaking at the Exchange ETF Conference, Michael Mack told financial advisors that the so-called Mag Seven technology stocks now represent approximately 35% of the S&P 500 index, a threshold that introduces meaningful concentration risk across client portfolios.
Mack, who serves as client portfolio manager at Victory Capital, emphasized that this concentration can appear in unexpected places. Advisors running multiple strategies may find the same handful of mega-cap names surfacing repeatedly, compounding single-stock and sector exposure beyond intended allocations. The risk is amplified by current valuations, with the broader market trading near 22 times earnings.
Free cash flow analysis offers a sharper lens on valuation pressure, particularly for technology stocks undertaking heavy infrastructure investment. Mack explained that artificial intelligence-related capital expenditures are depressing free cash flow generation at several Mag Seven companies, making them appear materially more expensive on a free-cash-flow basis than traditional earnings multiples would suggest. This divergence between earnings and cash metrics can mask valuation risk in portfolios relying solely on price-to-earnings screens.
The portfolio manager outlined several mitigation strategies for advisors seeking to manage concentration and valuation exposure. Small-cap allocations provide one avenue for diversification away from mega-cap dominance. Value strategies that hunt for meaningful discounts rather than mechanical low-multiple stocks offer another path, though Mack cautioned that advisors should layer in growth and profitability screens to avoid value traps—stocks trading cheaply for fundamental reasons.
Free-cash-flow-focused exchange-traded funds can serve as a complement to existing allocations, according to Mack. These strategies can broaden portfolio exposure beyond the mega-cap cohort that dominates cap-weighted indices, while fitting alongside dividend funds, value sleeves, and growth allocations. The approach allows advisors to maintain core index exposure while adding tactical diversification through cash-generative names that may sit outside the largest market capitalizations.
Victory Capital's portfolio construction framework incorporates free cash flow as a dual-purpose metric, useful in both value and growth analysis. For value managers, cash flow helps identify companies trading at discounts that also generate durable cash, reducing the risk of holding structurally impaired businesses. For growth strategies, free cash flow separates companies funding expansion through operations from those burning cash to sustain revenue growth, a distinction that becomes critical when interest rates remain elevated.
The discussion took place during a session of Zephyr's Adjusted for Risk series, recorded live at the ETF conference. Mack's remarks centered on practical portfolio implementation for financial advisors navigating a market environment defined by narrow leadership and elevated multiples. The concentration dynamic he described reflects a structural shift in US equity indices, where a small number of technology and AI-adjacent companies command unprecedented weightings.
For advisors building portfolios in this environment, the interplay between concentration risk and valuation metrics requires explicit attention. Traditional cap-weighted core holdings may deliver exposure levels to individual stocks or sectors that exceed policy targets, particularly when clients hold multiple strategies with overlapping positions. Free cash flow offers one tool for stress-testing whether current valuations reflect sustainable earnings or aggressive capital deployment that could pressure returns if growth expectations moderate.