Jensen Huang, co-founder and CEO of Nvidia Corp., shows off the new Blackwell GPU chip at the Nvidia GPU Technology Conference on March 18, 2024.
David Paul Morris/Bloomberg via Getty Images
The US stock market has been dominated by just a handful of companies in recent years. Some experts wonder whether this “concentrated” market is putting investors at risk, though others think such fears are likely exaggerated.
Let's take a look at the S&P 500the most popular benchmark for US equities, illustrating the dynamics at play here.
The top 10 stocks in the S&P 500 accounted for 27% of the index at the end of 2023, almost double the share from 14% a decade earlier, according to a recent Morgan Stanley analysis. (These are the 10 largest stocks by market capitalization.)
In other words, for every $100 invested in the index, about $27 was funneled into the stocks of just 10 companies, compared to $14 a decade ago.
According to Morgan Stanley, concentration growth is the fastest since 1950.
The increase will be even greater in 2024: according to data from FactSet, the top 10 stocks represented 37% of the index as of June 24.
The so-called “Magnificent 7” — Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia And Tesla — make up about 31% of the index, the report said.
'A little riskier than people realize'
Some experts fear that America's largest companies have outsized influence over investors' portfolios.
For example, shares of the Magnificent 7 will account for more than half of the S&P 500's gains by 2023, according to Morgan Stanley.
The concentration of the S&P 500 “is a little riskier than people realize,” said Charlie Fitzgerald III, a certified financial planner based in Orlando, Florida.
“Almost a third of [the S&P 500] is in seven stocks,” he said. “You don't diversify when you concentrate like that.”
Why stock concentration does not have to be a problem
The S&P 500 tracks the stock prices of the 500 largest publicly traded companies. This is done on the basis of market capitalization: the higher a company's stock value, the greater its weighting in the index.
There is euphoria in the field of technology shares has contributed to a higher concentration at the top, especially among the Magnificent 7.
Collectively, their shares are up about 57% over the past year through the market close on June 27 — more than double the 25% return of the entire S&P 500. Shares of chipmaker Nvidia alone have risen in that time tripled.
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Despite the sharp increase in stock concentration, some market experts believe the concerns are overblown.
First, many investors are diversified outside of the U.S. stock market.
For example, it is “rare” for 401(k) investors to own only a U.S. stock fund, according to one recent analysis by John Rekenthaler, vice president of research at Morningstar.
Many invest in target date funds.
A Vanguard TDF for near-retirees has a weighting of about 8% relative to the Magnificent 7; one for younger investors (who plan to retire in about three decades) has a weighting of 13.5%, Rekenthaler wrote in May.
There is a precedent for this market concentration
Moreover, the current concentration is not unprecedented compared to historical or global norms, according to Morgan Stanley's analysis.
Research by finance professors Elroy Dimson, Paul Marsh and Mike Staunton shows that the top 10 stocks made up about 30% of the U.S. stock market in the 1930s and early 1960s, and about 38% in 1900.
For example, the stock market was just as concentrated (or more concentrated) around the late 1950s and early 1960s, a period when “stocks were doing just fine,” said Rekenthaler, who has studied markets since 1958.
“We've been here before,” he said. “And when we were here before, it wasn't particularly bad news.”
When there have been major market crashes, they generally don't seem to have been linked to stock concentration, he added.
Compared to the world's 12 largest stock markets, the U.S. market was the fourth most diversified at the end of 2023 – ahead of Switzerland, France, Australia, Germany, South Korea, the United Kingdom, Taiwan and Canada, Morgan Stanley said.
'Sometimes you can be surprised'
According to experts, large U.S. companies generally appear to have enough profits to support their current high valuations, unlike during the peak of the dot-com bubble in the late 1990s and early 2000s.
The current market leaders generally have that higher profit margins and return on equity” than in 2000, according to a recent report from Goldman Sachs Research.
The Magnificent 7 are “not pie in the sky”: they generate “huge” returns for investors, says Fitzgerald, CEO and co-founder of Moisand Fitzgerald Tamayo.
“How much more profit can be made is the question,” he added.
If you focus this way, you are not diversifying.
Charlie Fitzgerald III
certified financial planner based in Orlando, Florida
Concentration would pose a problem for investors if the largest companies simultaneously have related activities that could be negatively affected, causing their share prices to fall simultaneously, Rekenthaler said.
“I'm struggling to think of what would hurt Microsoft, Apple and Nvidia at the same time,” he said. “They are in different aspects of the tech market.”
“Honestly, sometimes you can be surprised: 'I didn't see that kind of danger coming,'” he added.
A well-diversified stock portfolio will include the stocks of large companies (such as those in the S&P 500), as well as those of mid-sized and small U.S. companies and foreign companies, Fitzgerald said. Some investors might even include real estate, he said.
A good, simple approach for the average investor would be to buy a target date fund, he said. These are well-diversified funds that automatically change asset allocation based on the age of the investor.
His firm's average portfolio of 60-40 stock bonds currently allocates about 11.5% of its total holdings to the S&P 500 index, Fitzgerald said.
