Metamorphosis: How Flows, Ownership and Technology are Changing Markets

Justin Thomson
Head, Investment Institute and CIO

Passive investing, retail participation, and AI are changing how prices are formed.

Key Insights

• Recent market corrections have been shorter as policy responses and market structure encourage investors to buy weakness.
• Passive investing and index concentration are reshaping price discovery, suppressing index volatility while increasing stock dispersion.
• Understanding modern markets requires analyzing flows, incentives and ownership—not just fundamentals.

With contributions from Steven Boothe, David Corris, Mehmet Kinak, Gabriel Morris and Peter Stournaras

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¹ US Treasury yields rose 80bps from late February to mid-May. The 8% drawdown in the S&P 500 Index occurred from late February to late March.

² A cap-weighted index gives each company a weight based on its market value, so larger companies have a greater influence on the index than smaller ones.

³ Asness, C. S. (2024). The Less-Efficient Market Hypothesis. The Journal of Portfolio Management, 50th Anniversary Issue.

Risks:

Active investing may have higher costs than passive investing and may underperform the broad market or passive peers with similar objectives. Passive investing may lag the performance of actively managed peers as holdings are not reallocated based on changes in market conditions or outlooks on specific securities.

Investing in technology stocks entails specific risks, including the potential for wide variations in performance and unusually wide price swings, both up and down.

Technology companies can be affected by, among other things, intense competition, government regulation, earnings disappointments, dependency on patent protection, and rapid obsolescence of products and services due to technological innovations or changing consumer preferences.

Small-cap stocks have generally been more volatile in price than the large-cap stocks.

Securities issued by large-cap companies tend to be less volatile than securities issued by small- and mid-cap companies. However, large-cap companies may not be able to attain the high growth rates of successful small- and mid-cap companies, especially during strong economic periods, and may be unable to respond as quickly to competitive challenges.

Stocks generally fluctuate in value more than bonds and may decline significantly over short time periods. There is a chance that stock prices overall will decline because stock markets tend to move in cycles, with periods of rising and falling prices.

Diversification cannot assure a profit or protect against loss in a declining market.

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Please see vendor indices for more information, including definitions and source data: troweprice.com/marketdata.

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