It is a good time to be a stock picker right now.

The number of individual stocks outperforming the S&P 500 has exploded since the start of 2025 after a two-year stretch of unusually concentrated performance. That translates to a broader opportunity set for investors focused on trying to beat their benchmarks.

Through Friday's close, more than 49% of stocks in the S&P 500 SPX were sitting on a year-to-date gain that was larger than the 2.4% advance tallied by the index.

If this continues, it would mark the strongest participation since 2022, according to a MarketWatch analysis of FactSet data. So far, it also represents a notable departure from how the S&P 500 and its member stocks had behaved over the past two years.

During that time, fewer than 30% of S&P 500 members outperformed in 2023 and 2024 as a handful of megacap stocks - most notably, Nvidia Corp. $(NVDA)$ - helped power the index toward back-to-back calendar-year gains north of 20%.

The number of S&P 500 issues outperforming the broader index has shot higher in early 2025.

Not since 1998 and 1999 had the index relied so heavily on such an exclusive share of its members.

This shift, coupled with rising dispersion in single-stock performance expected by options traders, could signal boom times ahead for beleaguered active managers, financial professionals told MarketWatch.

"Dispersion increasing is good for active management," said Ben McMillan, chief investment officer at IDX Advisors, which offers several ETFs and mutual funds. McMillan added that another "golden age" for active strategies could be at hand.

The Cboe Dispersion Index, which measures the expected near-term variation in performance among shares in the S&P 500, has been trending higher recently. It hit a three-year high in late January.

Options traders expect the fortunes of individual S&P 500 will increasingly diverge over the next month.

Typically, the dispersion index declines as companies report their quarterly earnings, according to Cboe Global Markets. But over the past few weeks, the index has risen instead.

There are a few reasons for this. One is the quality of corporate results. Just as Wall Street had expected, earnings growth has started to broaden out during the fourth quarter. Previously, it had been extremely concentrated among members of the "Magnificent Seven," helping to justify the market's lopsided performance.

Another is an increasingly uncertain outlook for markets and the economy. Among other things, investors are raising questions about the potential risks and rewards tied to President Trump's policy agenda, the wisdom of some companies' massive investment in AI-related infrastructure, and the underlying strength of the U.S. economy.

"Single stock [volatilities] have remained extremely elevated even post earnings on the back of ongoing concerns over AI, tariffs, and the economic outlook," said Mandy Xu, head of derivatives market intelligence at Cboe, in emailed commentary shared with MarketWatch.

A rough stretch for active managers

Actively managed funds have generally struggled to beat their benchmarks over time, but the problem has grown particularly acute in recent years, according to data from S&P Dow Jones Indices.

Over the past couple of years, if active managers didn't bet big on highflying members of the "Magnificent Seven," like Nvidia, or other popular momentum names, like Palantir Technologies Inc. (PLTR) or Vistra Corp. $(VST)$, they were pretty much guaranteed to lag the S&P 500.

S&P Dow Jones Global Indices regularly publishes aggregate performance figures for actively managed funds in the U.S. and other markets. The latest update, published in October and covering the first half of 2024, highlighted that difficult environment that stock pickers had faced during the era of increasing concentration.

"The first half of 2024 will likely go down as another generally challenging period for the active management industry, most notably for funds focused on U.S. or global equities," said Anu Ganti, head of U.S. index investment strategy at S&P Dow Jones Indices, in a press release shared with MarketWatch at the time.

More recently, expensive corners of the market, like the information technology sector, have stalled. Meanwhile, cheaper consumer staples, financials and healthcare stocks have tallied a strong start to the year.

Shares of these companies have helped to pick up the slack as most members of the "Magnificent Seven" have struggled. With the exception of Meta Platforms Inc., $(META)$ which has seen its shares soar in the new year, every other member of the "Magnificent Seven" cohort has either fallen, or barely budged, since the beginning of 2025.

Despite this, the 10 largest stocks in the S&P 500, a group that includes every member of the "Magnificent Seven," still account for more than 37% of the index's entire market capitalization, according to an analysis from ClearBridge Investments.

The S&P 500 is still extremely concentrated relative to history.

But the intensity of this concentration has at least eased from its peak in 2024, and could signal that smaller stocks in the index could be poised to continue outperforming, according to Jeff Schulze, head of economic and market strategy at ClearBridge.

In the past, after concentration in the S&P 500 had surpassed the 24% threshold, an equal-weighted version of the S&P 500 has tended to outperform its capitalization-weighted sibling during the years that followed, according to Schulze. This has happened 96% of the time going back to 1989.

That's a relatively small sample. But although it is early days, the pattern seems to be holding up so far. Since the start of the year, the Invesco S&P 500 Equal Weight ETF RSP, which tracks the equal-weighted version of the S&P 500, has risen nearly 3% as of recent trading on Monday. By comparison, the traditional S&P 500 was up 2.3%, FactSet data showed.

Additionally, stocks trading outside of the U.S. have raced ahead, as popular equity indexes tracking markets in Europe and China are already sitting on double-digit gains in 2025.

As actively managed funds have struggled to outperform, investors have increasingly poured more money into cheap, index-tracking ETFs. One such product, the Vanguard S&P 500 ETF VOO, recently unseated the SPDR S&P 500 ETF Trust SPY, claiming the crown of largest U.S.-listed ETF by assets, with nearly $632 billion under management.