A handful of familiar large-cap stocks continue to lead the market, but that pattern is likely to shift in the coming months.

There is little doubt we are living through a unique time in markets due to COVID-19 and its impact on the economy. However, there are some familiar patterns worth noting. For example, it is typical of bear market rallies—which we are in the midst of—for high quality, large-cap companies with the potential to grow earnings in the absence of underlying economic growth to lead the rebound.

That’s happening now, as investors crowd into the same crop of stocks they also favored during the long, slow-growth expansion of the prior 10 years. The extension of that dynamic, even in a completely different phase of the market, is nothing to cheer about. While I recently warned investors not to chase the bear market rally, now I want to explain why they may want to consider scaling back on that familiar crop of dominant long-term winners and the passive indices they dominate.

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Beware of Crowds

Three key risks loom large. The first is concentration risk, which has risen for the S&P 500, the main benchmark for U.S stocks. Currently, the five largest stocks by market capitalization comprise 21.4% of the index, the highest level since 1978. But that top-five cohort accounts for only 7% of S&P 500 profits. Looking at the tech-heavy Nasdaq index, the same five stocks account for more than 44% of market capitalization, a record. That means individual investors may be a lot less diversified than they think they are.

The second, related risk is known as crowding. This describes when hedge funds and other big institutional investors pile into the same set of companies. If these large investors all head for the exits at the same time, high-quality stocks can fall much faster than you might expect.

A final risk worth highlighting is high valuations. The forward price-to-earnings ratio of those top-five S&P names averages 50, while the next 495 names have an average P/E of 17.

The Recession Vortex

This phase of a bear market requires patience, as the recession vortex swirls. Markets trade based on what investors see happening 9 to 12 months from now, and too many uncertainties exist around the trajectory of the pandemic or the pace of economic reopening for a clear picture to emerge. That’s why I expect markets to remain range-bound and volatile for at least the next several months.

A cure or treatment for COVID-19 could be a catalyst for investors to anticipate an economic recovery that would likely lead to inflation, especially given the amount of fiscal and monetary stimulus being provided. That environment would probably benefit small-cap, international and value-style stocks, as well as corporate bonds and commodities. Today’s leaders could quickly become laggards.

Bottom line: I think investors should diversify across sectors and geographies, favoring active managers over passive index funds. We expect a reflationary period to follow the current contraction. Watch for clues, such as rising long-term interest rates, that this major shift may be on the horizon.