Jensen Huang, co-founder and CEO of Nvidia Corp., introduces the new Blackwell GPU chip during the Nvidia GPU Technology Conference on March 18, 2024.
David Paul Morris/Bloomberg via Getty Images
The U.S. stock market has been dominated by about a handful of companies in recent years. Some experts question whether this “concentrated” market poses a risk to investors, while others believe such fears are likely overblown.
Let’s take a look S&P 500the most popular benchmark for US stocks, as an example of the dynamics at play here.
According to a recent analysis by Morgan Stanley, the top 10 stocks in the S&P 500, the largest by market capitalization, accounted for 27% of the index at the end of 2023, nearly double the 14% share a decade earlier.
In other words, for every $100 invested in the index, about $27 went into the stocks of just 10 companies, down from $14 a decade ago.
According to Morgan Stanley, this concentration increase is the fastest since 1950.
It’s risen even more in 2024: The top 10 stocks accounted for 37% of the index as of June 24, according to FactSet data.
The so-called “Magnificent Seven” – Apple, Amazon, alphabet, Meta, Microsoft, Nvidia And Tesla — make up about 31% of the index, it said.
“A little more risky than people realize.”
Some experts worry that the largest U.S. companies have an outsized influence on investors’ portfolios.
For example, Magnificent Seven stocks accounted for more than half of the S&P 500’s gain in 2023, according to Morgan Stanley.
Just as these stocks have helped boost overall returns, a downturn in one or more of them could put investors’ money at risk, some said. For example, Nvidia lost more than $500 billion in market value after a three-day selloff in June, sending the S&P 500 into a multi-day losing streak. (The stock has recovered somewhat since then.)
The S&P 500’s concentration “is a little riskier than you think,” said Charlie Fitzgerald III, a certified financial planner based in Orlando, Florida.
“Almost a third of it [the S&P 500] lies in seven stocks,” he said. “You don’t diversify when you focus that way.”
Why stock concentration may not be a problem
The S&P 500 tracks the share prices of the 500 largest listed companies. This is done based on market capitalization: the higher a company’s share valuation, the greater its weighting in the index.
The euphoria in tech stocks has helped increase concentration at the top, particularly among the Magnificent Seven.
Overall, Magnificent Seven shares were up about 57% last year as of the close on June 27 – more than double the 25% return of the entire S&P 500. Shares in chipmaker Nvidia alone have tripled during this time.
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Despite the sharp increase in stock concentration, some market experts believe the concerns may be overblown.
For one thing, many investors are diversified beyond the US stock market.
For example, it is “rare” for 401(k) investors to own just one U.S. stock fund, according to a recent analysis by John Rekenthaler, vice president of research at Morningstar.
Many people invest in target-date funds.
A Vanguard TDF for investors nearing retirement has a weighting of about 8% against the Magnificent Seven, while one for younger investors planning to retire in about three decades has a weighting of 13.5%, Rekenthaler wrote in May.
There is a precedent for this market concentration
Furthermore, the current concentration is neither unprecedented by historical or global standards, according to Morgan Stanley analysis.
Research by finance professors Elroy Dimson, Paul Marsh and Mike Staunton shows that the top 10 stocks accounted for about 30% of the U.S. stock market in the 1930s and early 1960s, and about 38% in 1900.
The stock market, for example, was just as concentrated (or more so) in the late 1950s and early 1960s, when “stocks were doing quite well,” said Rekenthaler, whose research has studied markets since 1958.
“We’ve been here before,” he said. “And when we were here before, there wasn’t any particularly bad news.”
When major market crashes have occurred, they generally do not appear to be associated with stock concentration, he added.
Compared to the world’s dozen largest stock markets, the U.S. market was the fourth most diversified at the end of 2023 – better than those of Switzerland, France, Australia, Germany, South Korea, the United Kingdom, Taiwan and Canada, Morgan Stanley said.
“Sometimes you can be surprised”
Unlike the peak of the dot-com bubble in the late 1990s and early 2000s, large U.S. companies generally also appear to have the profits to support their current lofty valuations, experts say.
Today’s market leaders “generally have higher profit margins and returns on equity” than those in 2000, according to a recent report from Goldman Sachs Research.
The Magnificent Seven “aren’t balloons”: They generate “tremendous” income for investors, said Fitzgerald, director and founding member of Moisand Fitzgerald Tamayo.
“How much more profit can be made is the question,” he added.
When you focus this way, you don’t diversify.
Charlie Fitzgerald III
certified financial planner based in Orlando, Florida
Concentration would be a problem for investors if the largest companies had related businesses that could be negatively impacted at the same time, and then their stocks could fall at the same time, Rekenthaler said.
“It’s hard for me to imagine what would hurt Microsoft, Apple and Nvidia at the same time,” he said. “They operate in different areas of the technology market.”
“To be fair, sometimes you can be surprised: ‘I didn’t see this kind of danger coming,'” he added.
A well-diversified stock portfolio includes the stocks of large companies, such as those in the S&P 500, as well as the stocks of medium and small U.S. and foreign companies, Fitzgerald said. Some investors might even include real estate, he said.
A good and simple approach for the average investor would be to buy a target-date fund, he said. These are well-diversified funds that automatically switch asset allocation depending on the investor’s age.
His company’s average 60-40 stock-bond portfolio currently allocates about 11.5% of its total holdings to the S&P 500 index, Fitzgerald said.
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2024-07-01 14:35:31
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