Playing the Gamma Knife Market
The market’s acting differently — here’s why:
I’d like to share an analogy that’s useful for understanding how stock markets move.
First though, why does this matter?
Investors face plenty of baffling questions: What does the dominance of passive mean? Are the Magnificent Seven too big? Is active management dead? And sure; there are plenty of answers too, but most oversimplify.
A common crime is to attribute everything to the rise of passive investing, then blithely imply all investors are — as one — only buying an S&P500 tracker (if you’re American) or an MSCI World tracker (if you’re anyone else).
Obviously loads of people are doing this and that has an impact. But it’s not what everyone’s doing, and it’s far from the only impact. Clearly it’s inadequate for explaining something like the high concentration in the Magnificent Seven: If folk were only buying the size-weighted S&P 500, that would lift all 500 companies equally, and not grow or shrink any company’s weight within that index.
This is where the Gamma Knife analogy helps. This is a piece of surgical tech that removes brain tumours by zapping them with gamma-ray beams (I’m going to upset the boffins by calling this a ‘laser’ from now on).
The trouble is, when a single beam is strong enough to kill a tumour, it fries anything it hits before and after the tumour too. Which, if you’re firing it into a brain, is obviously not good.
Enter the Gamma Knife. Picture a patient with a colander clamped to their head. Through each hole is fired a laser that is, by itself, too weak to harm anything — including the tumour. But when all 192 lasers are focused to intersect at the exact same spot, they roast whatever’s there (hopefully the tumour).
The market
This is a good way to imagine the stock market. But instead of gamma radiation, it’s firing capital at each stock: The more money-lasers intersecting on any stock, the more its price will rise, and the bigger it will grow.
Now we can ask; how many lasers beams are being fired at a company? How strong are they? Who’s firing them? And why are they firing them?
It’s useful here to understand how the market has changed. In the nineties, it was a stock picker’s domain: Most lasers were fired by investors who considered each stock on its own fundamentals: Growth potential; balance sheet; valuation; and so on. This added up to a market with a lot of laser beams, but with each having less power.
Today, the market has changed dramatically: There are fewer lasers; they are bigger, and they are less precise.
One reason for this is the rise of passive investing. Estimates vary, but if passive isn’t half the market today, it soon will be. So yes, once a stock is included in a highly-tracked index, it does benefit from having some huge, powerful lasers focused on it.
But once a stock is inside the S&P500, the S&P500 tracker lasers won’t cause it to change position within that index. It takes other lasers to cause a stock’s index weighting to rise or fall. Who is firing them?
Some are still fired by active investors. Their power has collectively weakened, but still has some effect. So, much as us active believers bemoan the rise of the Magnificent Seven, there’s no disputing that most of their rise was warranted by their huge real-world profits. It would be a weird, dysfunctional market if those companies weren’t the world’s biggest, and so active decision makers have acknowledged reality by training their lasers on these modern-day behemoths, helping to boost them within the index.
Buying the story
But they’re not alone. My clan — the asset allocators — have evolved dramatically too. When I started out, the common allocator model was to hold a selection of interesting active funds, then hop between asset classes or regions.
But nowadays, allocators have shifted further towards a thematic ‘top-down’ approach, in which they buy imprecise buckets of theme-linked stocks that fulfil a narrower narrative.
The AI data centre build out? European rearmament? The rise of veganism? You name it, there’s an ETF for it (or an investment bank playlist). And they no longer have to pay a stock picker to analyse individual companies either. This helps the allocator, as it’s cheaper at a time when cutting fees (ideally not your own) has been an imperative.
This means there’s now less capital fired at a company for fundamental investment reasons, and more for sales and marketing purposes. The designers of these ETFs want two things: for them to be appealing and scalable. So it helps to include large, liquid stocks that have recently performed well — even if their link to the theme is tenuous — because it allows them to grow the ETF larger, and it makes the back-test look better.
Take the Vegan Climate ETF (which is an actual thing that I didn’t make up): Soon after its launch in 2019, its largest holding was not, as you might guess, a veggie favourite like Beyond Meat. It was a 5% position in Apple which, other than being named after a fruit, is hardly a vegan pureplay. Its other top-five positions were Microsoft, Alphabet, Meta and Mastercard, resulting in a homeopathically low exposure to its stated theme.
Anyone buying VEGN (its ticker — nice), be it for ethical reasons or to play the hot trend of the late 2010s, was — probably unwittingly — firing their laser at the same stocks that dominate the S&P500, thereby helping to further boost their weight within the main index.
Now imagine thousands of different thematic ETFs, all finding excuses to hold big positions in huge, liquid, winning stocks. Mix them in with the remaining active investors (who are increasingly having to copy the market to stay in a job), and you have a better view how and why the market is heating up the giant-caps, while still managing to discriminate between them.
And if you’re an illiquid micro-cap company with great prospects but a patchy recent record? Doesn’t matter if you built your HQ from recycled tofu, you’re not getting into the Vegan Climate ETF.
It’s this factor, I believe, that helps explain the current gulf in valuations between small caps (cheap) and the world’s biggest companies (pricey).
Sharks with laser beams
But that’s still not all. Other new powerful laser beams are now fired by the massive multi-manager hedge-fund ‘pod shops’, such as Citadel and Millennium. Long story short; they’ll only hold a stock if it’s going up. Nothing else matters, and as soon as it loses momentum, it’s out.
What does this all add up to?
It’s a Jackanory market in which stories have far more sway than they used to. If a company finds itself at the heart of rip-roaring narrative, and it’s big enough to be included in popular products, it will find itself heated up more quickly, and to a higher temperature. And if it appears in several stories? Hold on tight.
That story doesn’t have to be fictional, by the way. Take Defence: political changes suggest defence companies stand to make more money than we expected a decade ago, so their prices should have risen. But today’s market will likely overheat them all, and will be less concerned with either their valuation or whether they’re a good company or not.
The flipside comes when the lasers turn off. With no active buyers to step in, stock prices plummet as previously positive feedback loops turn negative.
This means that the market still just about ‘works’. But if you take Keynes’ old adage about it being a voting machine in the short term but a weighing machine in the long term, it’s spending a lot more time voting now.
But it does — eventually — weigh. And if you’re found wanting on weigh-in day, the impact will be swift and brutal. Put another way; fundamentals will out, they’ll just take longer to do so.
This was first published in Citywire Magazine in January 2026.
