Top ten share of S&P 500 market cap
Source: FS Investments, Bloomberg Finance, L.P., as of May 31, 2023.
- Markets rallied this week as investors largely overlooked a “hawkish pause” by the Fed. The week’s action was generally in line with the year-to-date run-up; the S&P is up 16.2% despite a questionable economic backdrop that has produced an air of uncertainty around the outlook for risk assets.
- Investors have no doubt enjoyed the strong returns, yet they underscore a potential weakness. Namely, more than 85% of gains in the S&P 500 YTD can be attributed to seven of the largest stocks in the index.1 Outside these megacap, mostly tech names, performance looks much weaker, especially in cyclical industries.
- In fact, investing in the S&P 500 today increasingly implies a concentrated bet on a small group of stocks. As the chart shows, the top 10 stocks’ share of the S&P 500 Index has nearly doubled, from about 17% in 2015 to 32% today.1 What’s more, these same stocks driving the index’s return have become increasingly expensive as their share of the Index has grown.
- It should come as no surprise that an extended era of low and declining interest rates has delivered a market that is concentrated in stocks that mostly benefit from low and declining interest rates. Yet, the top of the U.S. stock market increasingly trades as a bond proxy, which has wide-ranging consequences for portfolio construction.
- Eventually there is a point where the music stops. With this in mind, investors would be wise to proactively address the risks that elevated concentrations may pose in their portfolios today.
