Key takeaways
- Gains over the first five months of 2023 were overwhelmingly driven by a few large stocks.1
- Concentration in U.S. equity markets has risen sharply since 2015, with the top 10 of the S&P 500 now comprising 30% of total index market cap.2
- The cash flow of these stocks is impressive, but their relative valuations look historically expensive.
- An extended period of low and declining interest rates has delivered a market concentrated in stocks that benefit from this macro environment.
- We believe investors should be proactive in adjusting their strategies to reflect the increased risk from concentration.
The U.S. stock market is concentrated in a small number of stocks to a degree it has not been in roughly four decades. While the performance of this cohort has driven stellar gains for U.S. indexes over the last ten years, high concentration now presents a problem for investors going forward.
Despite a strong start to 2023 for U.S. equity indexes, there remains an air of uncertainty around the outlook for risk assets. One reason for the apprehension is likely the narrow nature of the returns; 88% of gains in the S&P 500 YTD can be attributed to seven of the largest stocks in the index.1 Outside these megacap names, market performance looks much weaker, especially in cyclical industries. This type of perplexing and challenging investing environment is an inevitable consequence of a market that is highly concentrated in a few stocks, especially when those stocks share common traits. In this note, we will quantify the extent of U.S. equity market concentration, compare today’s backdrop to that of previous concentrated markets and discuss the significant implications for equity investors. Our view is that while concentration has worked to investors’ benefit in 2023, this period should be taken as a warning the strategies employed to generate strong gains over the past decade will not be the same as those needed in the coming period.
