SKN | Charles Schwab Warns U.S. Equity Concentration Could Leave Investors Underdiversified

Key Takeaways:

• Charles Schwab projects developed international large-cap equities to return 7.0% annually through 2035, compared with 5.9% for U.S. large-cap stocks.
• International small-cap equities have an estimated annual return of 8.0%, reflecting valuation differences and higher expected dividend yields.
• The 10 largest S&P 500 constituents represent approximately 40% of the index, increasing concentration risk for portfolios heavily weighted toward U.S. equities.

Charles Schwab is highlighting a diversification risk that may be underestimated by investors whose portfolios are concentrated in U.S. equities. Its 2026 Long-Term Capital Market Expectations forecast suggests that developed international stocks could outperform U.S. large-cap equities over the decade through 2035, as more attractive valuations and higher expected dividend yields support long-term return potential.

Schwab’s Forecast Favors International Equity Exposure

Schwab’s capital market projections, based on data through October 31, 2025, estimate annualized returns of 7.0% for developed international large-cap equities and 8.0% for developed international small-cap equities over the 2026–2035 period. By comparison, U.S. large-cap stocks are projected to return 5.9% annually, down from the previous estimate of 6.0%.

The downward adjustment to the U.S. forecast reflects a valuation challenge: market prices have risen faster than improvements in the corporate earnings outlook. International equities, meanwhile, benefit from comparatively attractive valuations and higher expected dividend yields, which Schwab identifies as important contributors to their long-term return potential.

Although the annual forecast differences may appear modest, compounding can make them meaningful over a decade. For investors building retirement portfolios or managing multigenerational wealth, the projections underscore the importance of evaluating expected returns across regions rather than relying primarily on recent U.S. market performance. These estimates remain long-term assumptions, not guaranteed outcomes.

S&P 500 Concentration Changes the Diversification Equation

The case for international exposure is reinforced by the growing concentration of the U.S. equity market. According to the figures cited in the report, the 10 largest companies now account for approximately 40% of the S&P 500. With the index heavily weighted toward technology and growth-oriented businesses, investors holding broad U.S. index funds may have more exposure to a relatively small group of companies than they realize.

This concentration does not automatically make U.S. equities unattractive, but it can limit the diversification investors expect from holding a large number of index constituents. Portfolio performance may become increasingly dependent on the earnings, valuations and market sentiment surrounding the largest companies.

International equities offer a potential counterweight by broadening geographic and market exposure. Their historical outperformance of U.S. equities in 2025 also demonstrated that leadership can shift between regions, although one year of relative performance does not establish a lasting trend.

Portfolio Implications for Long-Term Investors

Schwab’s outlook places regional allocation and valuation discipline at the center of long-term portfolio construction. Low-cost international exchange-traded funds can provide access to overseas markets without necessarily imposing a substantial increase in investment costs. However, currency movements, regional economic conditions and market-specific risks can affect realized returns.

For sophisticated investors, the central issue is whether existing portfolios contain genuine geographic diversification or primarily reflect the performance of a concentrated U.S. market. Schwab’s projections support reassessing that balance over a long investment horizon, while recognizing that forecasts can change as valuations, earnings expectations and economic conditions evolve.

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