Nvidia co-founder and CEO Jensen Huang demonstrated the new Blackwell GPU chip at the Nvidia GPU Technology Conference on March 18, 2024.
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In recent years, the U.S. stock market has been dominated by a handful of companies. Some experts question whether such a “concentrated” market puts investors at risk, but others believe such concerns may be exaggerated.
let us see S&P 500 Indexis the most popular benchmark for the U.S. stock market and can illustrate current dynamics.
The top 10 stocks with the largest market capitalization in the S&P 500 Index accounted for 27% of the index as of the end of 2023. almost double A decade ago, it was 14%, according to a recent analysis by Morgan Stanley.
In other words, for every $100 invested in the index, about $27 is invested in the stocks of 10 companies, compared with $14 a decade ago.
Morgan Stanley says concentration is growing at the fastest pace since 1950.
Bigger gains in 2024: The top 10 stocks accounted for 37% of the index as of June 24, according to FactSet data.
The so-called “Seven Heroes”—— apple, Amazon, letter, Yuan, Microsoft, Nvidia and Tesla — accounting for about 31% of the index, it said.
“The risk is a little bigger than people realize”
Some experts worry about the outsized impact America’s largest companies have on investors’ portfolios.
For example, more than half of the S&P 500’s gains in 2023 will be in Big Seven stocks, according to Morgan Stanley.
Concentration in the S&P 500 is “a little bit more risky than people realize,” said Charlie Fitzgerald III, a certified financial planner in Orlando, Florida.
“Nearly a third of the stocks (in the S&P 500) are held in seven stocks,” he said. “When you focus like that, you’re not diversifying.”
Why inventory concentration may not be an issue
The S&P 500 index tracks the stock prices of the 500 largest public companies. It does this through market capitalization: the greater a company’s stock valuation, the greater its weight in the index.
Tech stocks are booming Helped increase concentration at the top, especially among the Big Seven.
As of the close on June 27, shares of the seven largest companies have collectively gained about 57% over the past year, more than double the 25% return for the entire S&P 500 index. It’s tripled.
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Despite the sharp rise in inventory concentration, some market experts believe the concerns may be overblown.
For one, many investors are diversifying beyond the U.S. stock market.
For example, it’s “rare” for a 401(k) investor to own just one U.S. stock fund, according to one firm Recent analysis Author: John Rekenthaler, Vice President of Research at Morningstar.
Many people invest in target-date funds.
Rekenthaler wrote in May that a Vanguard TDF aimed at those approaching retirement had a weight of about 8%, while a TDF aimed at younger investors targeting retirement in about 30 years had a weight of 13.5%.
There is precedent for this kind of market concentration
Furthermore, according to Morgan Stanley’s analysis, the current concentration is not unprecedented by historical or global standards.
Research by finance professors Elroy Dimson, Paul Marsh and Mike Staunton shows that between the 1930s and early 1960s, the top 10 Stocks account for about 30% of the U.S. stock market, and about 38% in 1900.
For example, stock market concentration was the same (or higher) in the late 1950s and early 1960s, and “stocks did very well” during that period, said Rekenthaler, whose research examined Market since 1958.
“We’ve been here before,” he said. “When we came here before, it wasn’t particularly bad news.”
He added that when major market crashes occur, they often appear to be unrelated to stock concentration.
Morgan Stanley said that compared with a dozen of the world’s largest stock markets, the U.S. market ranked fourth in diversification as of the end of 2023, better than Switzerland, France, Australia, Germany, South Korea, the United Kingdom, Taiwan and Canada. Stanley said.
“Sometimes you’ll be surprised”
Experts say that unlike at the peak of the dot-com bubble in the late 1990s and early 2000s, major U.S. companies also appear to generally have enough profits to support their current high valuations.
Today’s market leaders “usually have higher profit margins A recent research report from Goldman Sachs shows that both “return on equity and return on equity” are higher than in 2000.
Moisand Fitzgerald Fitzgerald, principal and founding member of Tamayo, said the Big Seven companies “are not castles in the air”: they generate “huge” income for investors.
“The question is how much more can be gained,” he added.
When you focus like this, you’re not diversifying.
Charlie Fitzgerald III
Certified Financial Planner in Orlando, FL
Rekenthaler said concentration would become an issue for investors if related businesses of the largest companies could be negatively affected at the same time, at which point their stocks could fall at the same time.
“It’s hard for me to imagine what would hurt Microsoft, Apple and Nvidia at the same time,” he said. “They’re on different sides of the tech market.”
“To be fair, sometimes you’re surprised: ‘I didn’t see that danger coming,'” he added.
Fitzgerald said a well-diversified stock portfolio would include stocks of large companies, such as those in the S&P 500, as well as stocks of small and mid-sized U.S. companies and foreign companies. Some investors may even include real estate, he said.
He said a good, simple approach for the average investor is to buy a target-date fund. These are highly diversified funds that automatically switch asset allocations based on the age of the investor.
Fitzgerald said his firm’s average 60-40 stock and bond portfolio currently allocates about 11.5% of its total holdings to the S&P 500.
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