- A decade ago the ten largest US companies accounted for 14% of the S&P 500 stock index. Nowadays, their number is more than a third.
- Tech enthusiasm has helped strengthen the “Magnificent Seven” stocks: Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla.
- Some experts worry that such a focus could put traders at risk. Others believe that it is no longer a viable business.
The US stock market has recently become dominated by a handful of businesses. Some experts question whether that “concentrated” market puts traders at risk, although others believe such fears are probably overblown.
Let’s take a look at the S&P 500, the most prevalent benchmark for US stocks, as an example of the dynamics at play.
The 10 stocks that dominate the most important S&P 500 in terms of market capitalization accounted for 27% of the index at the end of 2023, nearly double the 14% proportion a decade ago, according to a fresh Morgan Stanley study.
In other words, for every $100 invested in the index, shares of just 10 companies contributed about $27, up from $14 a decade ago.
According to Morgan Stanley, the rate of growth in focus is the fastest since 1950.
This has improved even further in 2024: The top 10 stocks account 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 bit risky due to crowd information’
Some experts worry that major US companies are exerting too much influence on investors’ portfolios.
For example, Grand Seven stocks could account for more than half of the S&P 500’s gains in 2023, according to Morgan Stanley.
Just as those stocks helped drive overall returns, a decline in one or several of them could put investors’ money at risk, some said. For example, Nvidia lost more than $500 billion in market value after its latest three-day selloff in June, sending the S&P 500 into a multi-day losing streak. (Inventories have since recovered somewhat.)
The S&P 500’s focus “is a little riskier than people realize,” said Charlie Fitzgerald III, a licensed financial planner based in Orlando, Florida.
“About a third of the (S&P 500) is sitting in seven stocks,” he said. “When you’re focused like this you’re not diversifying.”
Why inventory focus is probably not a priority
The S&P 500 tracks the inventory costs of the five hundred largest publicly traded companies. It does this through market capitalization: the larger a company’s stock valuation, the greater its weighting in the index.
Tech-stock enthusiasm has helped focus upward pressure on dominance, particularly among some of the Grand Seven.
Combined, as of market close on June 27, shares of the Grand Seven are up nearly 57% today – more than double the 25% return of the entire S&P 500. Chip maker Nvidia’s stock has tripled in that lifetime alone.
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Despite smart building in inventory focus, some marketplace experts believe fear may also be on the rise.
For one, many traders have diversified beyond the US inventory market.
For example, according to contemporary research by John Reckenthaler, vice president of studies at Morningstar, it is “rare” for 401(k) traders to have only US inventory investments.
Many people invest money in target-date price ranges.
Reckenthaler wrote in May that the Leading Edge TDF for near-retirees has about an 8% weighting for the Grand Seven, with a 13.5% weighting in the first week for more youthful traders who attempt to step down in about 3 years.
This is an example for market focus
Furthermore, consistent with Morgan Stanley research, the wave focus is not consistent with historical or global needs.
Analysis by finance professors Elroy Dimson, Paul Marsh, and Mike Staunton shows that the dominant 10 stocks made up about 30% of the US stock market in the 1930s and 1960s, and about 38% in 1900.
The stock market used to be just as concentrated (or more so) in the late ’50s and early ’60s, for example, a period when “stocks performed well,” said Reckenthaler, whose analysis Investigates the markets since 1958.
“We have been here before,” he said. “And when we were here before, it wasn’t particularly bad news.”
He added that, when large-scale marketplace crashes have occurred, they generally do not seem to be related to inventory focus.
Compared with the region’s largest stock markets, the US market was the fourth most diversified at the end of 2023 – better than Switzerland, France, Australia, Germany, South Korea, the UK, Taiwan and Canada, Morgan Stanley said.
‘You’ll be shocked from time to time’
Obese U.S. companies often appear to have the money to support their stellar valuations, unlike at the peak of the dot-com bubble in the late nineties and early 2000s, experts said.
Consistent with contemporary Goldman Sachs analysis records, given-day marketplace leaders “generally have higher profit margins and returns on equity” than in 2000.
The Grand 7 are “not pie-in-the-sky companies”: they are generating “tremendous” income for traders, said Fitzgerald, principal and founding member of Moisand Fitzgerald Tamayo.
“How much more profit can be made is the question,” he said.
Reckenthaler said that focus could be a weakness for investors if the largest companies have separate companies that could be negatively affected together, to the point where their shares could fall together.
“I have trouble imagining what losses Microsoft, Apple, and Nvidia would incur at the same time,” he said. “They’re in different aspects of the technology market.”
He added, “In fairness, sometimes you might wonder: ‘I didn’t see that type of threat coming.’
Fitzgerald said a well-diversified equity portfolio would come with stocks of giant companies (like those in the S&P 500) as well as stocks of medium-sized and smaller U.S. companies and foreign companies. Some investors will also likely bring in real estate, he said.
A good, easy approach for the average investor could be to buy target-date investments, he said. They are well-diversified price ranges that automatically turn asset allocation according to the investor’s opportunity.
Fitzgerald said his company’s proper 60-40 stock-bond portfolio recently allocated about 11.5% of its typical holdings to the S&P 500 index.
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