Concentration issues: A look at the top-heavy U.S. equity market

Rising U.S. equity market concentration has played a key role in the stellar stock market returns over the first five months of 2023. Looking ahead, high concentration could present a perplexing and challenging market environment for investors.

Read the note
May 31, 2023 | 8 minute read

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.

  • Bloomberg Finance, L.P., as of May 19, 2023.

  • FS Investments, as of April 30, 2023.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Andrew Korz, CFA

Executive Director, Investment Research

Brian Cho, CFA

Managing Director, Head of Quantitative Research, FS Chiron Funds

Lara Rhame

Chief U.S. Economist + Managing Director

Search our site