Goldman Sachs Sounds Alarm: Most Large-Cap Funds Are Falling Short as Magnificent Seven Weighs on Returns
The S&P 500 has posted a roughly 9% gain so far this year, and large-cap mutual funds have risen in absolute terms. But as Goldman Sachs sees it, the gap between those two facts tells a deeper story about the state of active management.
In a research note published May 20, Goldman analysts examined the quarterly positioning of 509 large-cap active mutual funds—representing a combined $3.9 trillion in equity assets—and found that only 29% are beating their benchmarks year-to-date. That’s well below the historical average of 37% and marks one of the worst stretches for active stock pickers in recent years.
Authored by Ryan Hammond, Daniel Chavez, Ben Snider, Jenny Ma, Kartik Jayachandran, and Christophe Sung, the report identifies a single structural issue at the center of the underperformance: heavy underweighting of the Magnificent Seven. As of the first quarter of 2026, large-cap funds were collectively 723 basis points underweight those seven mega-cap stocks, up from 710 basis points in the fourth quarter of 2025. At the scale of a $3.9 trillion asset base, that positioning gap creates a persistent drag on relative returns, no matter how well the rest of the portfolio performs.
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On a net basis, mutual funds reduced positions in every single member of the Magnificent Seven during Q1, with Alphabet seeing the largest cut despite its strong year-to-date performance. While Apple, Nvidia, Alphabet, and Amazon have outperformed, Microsoft, Tesla, and Meta have lagged, creating wide dispersion within the group. Yet even amid that mixed picture, the average fund trimmed exposure to all seven names—a move Goldman describes as both defensive and structurally driven.
The performance gap is not uniform across fund styles. Goldman data show that 50% of large-cap growth funds are beating their benchmarks, compared with 25% of core funds and just 13% of value funds. The divergence reflects where market leadership has concentrated. Value funds, by definition, tend to underweight expensive, high-multiple growth stocks—including the Mag 7. When those stocks account for an outsized share of index returns, the structural underweight in value strategies becomes a direct drag, independent of stock-picking skill.
Benchmark concentration compounds the problem. The S&P 500’s return is increasingly driven by a handful of enormous stocks, and even a marginally smaller weight in those names can produce a meaningful performance gap. As Goldman notes, diversification constraints and risk management frameworks prevent many funds from simply matching benchmark weights in stocks that have grown to dominate the index.
Beyond the Mag 7, Goldman identified a notable thematic rotation inside mutual fund portfolios during Q1. Fund managers increased their semiconductor overweight by 25 basis points to plus 49 basis points, while simultaneously deepening their software underweight by 12 basis points to minus 36 basis points (excluding mega-caps). This semis-versus-software preference is now the widest since at least 2012. Mutual funds hold their lowest exposure to software since that same year, while the overweight in semiconductors remains modestly below the peaks reached in 2023 and 2024.
Six of the twenty most popular mutual fund additions in Q1 were constituents of Goldman’s AI Data Centers basket, including Arista Networks, Corning, SanDisk, and Coherent. The rotation mirrors the broader market narrative: hyperscaler capital expenditure upgrades have buoyed semiconductor names, while concerns about AI disruption have clouded software valuations. But Goldman’s note points out an irony: even as funds rotate aggressively into AI infrastructure, the strong performance of some of those positions means funds still struggled to keep pace with rising benchmark weights in the same names.
Goldman’s report delivers a blunt message for the active management industry. The market is being driven by a small set of enormous stocks, and many active funds are underweight those stocks for structural reasons—diversification limits, risk controls, and valuation discipline that make it difficult to hold expensive mega-caps at benchmark weight. The result: good stock selection across the rest of the portfolio isn’t enough to overcome the drag from being underweight the five or ten names that matter most to index returns.
The numbers drive the point home. Goldman’s Mutual Fund Overweight basket—the 50 stocks that the average large-cap fund owns most heavily—has returned minus 3% year-to-date. That compares with plus 6% for the equal-weight S&P 500 and plus 14% for the Mutual Fund Underweight basket. Active managers’ favorite stocks aren’t just underperforming the market; they are significantly underperforming the stocks those same managers are avoiding.
For investors in actively managed large-cap funds, the data imply that beating the benchmark in the current environment requires either a willingness to own the Mag 7 at or above benchmark weight, or the ability to generate enough alpha elsewhere to offset the structural drag from being underweight. Goldman’s note suggests most funds are doing neither with sufficient conviction. The gap between 29% outperforming and the 37% historical average is unlikely to close until either market leadership broadens or active managers meaningfully increase their exposure to the stocks driving the index.
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This story was originally published by TheStreet on May 24, 2026, in the Investing section. Add TheStreet as a Preferred Source by clicking here.