Why it's getting easier for active managers to beat the S&P 500 in 2025

Active large-cap U.S. equity funds significantly improved their performance against the S&P 500 in the first half of 2025, with only 54% lagging the index, a notable decrease from 65% in 2024 and their best relative showing since 2022. This enhanced performance is attributed to increased market dispersion, broader sector participation beyond technology, and a higher percentage of individual S&P 500 stocks outperforming the index. This shift suggests a more favorable environment for active stock picking, potentially reversing the long-standing trend of active management underperformance against benchmarks.

Analysis

Data from the first half of 2025 indicates a significant improvement in the performance of active fund managers relative to passive benchmarks, potentially signaling a shift in market dynamics. Only 54% of active large-cap U.S. equity funds underperformed the S&P 500, a marked decrease from 65% for the full year 2024 and the strongest showing since 2022. This trend is attributed to a confluence of factors, chiefly higher market dispersion and broader participation in the rally. The number of S&P 500 constituents outperforming the index rose to 47.7% as of July 1, a stark contrast to 2023 and 2024 when fewer than 30% of stocks beat the index, a level of concentration previously unseen since 1998. This suggests the market is no longer solely driven by a few mega-cap technology names like Nvidia. The rally has broadened to include strong gains in the industrials, financials, and utilities sectors. The environment has been particularly favorable for managers outside U.S. large-caps, with over 70% of small- and mid-cap managers outperforming their benchmarks and international funds also faring well, reinforcing the theme of broadening global opportunities.

Key Decisions for Investors

• Given that only 54% of active large-cap managers are now lagging the S&P 500, investors should re-evaluate their allocation between passive and active strategies, as the current environment of higher dispersion is more conducive to stock-picking.
• Consider diversifying portfolio exposure beyond U.S. mega-cap technology, allocating capital toward small- and mid-cap funds where over 70% of managers are outperforming, and international equities which are exhibiting strong relative gains.
• Investors should closely monitor market breadth and dispersion metrics, as a return to the narrow, mega-cap-led market seen in 2023-2024 could reverse the current favorable conditions for active managers.