FireSide: Concentration issues—Focusing on the top-heavy U.S. equity market

The Investment Research team unpacks the risks of elevated concentration in U.S. equity markets

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June 22, 2023 | 24 minute read

About this episode:

In this episode of FireSide, the Investment Research team explores the unprecedented concentration in the U.S. equity market. This top-heavy market meant impressive returns for investors over the first half of the year, but it could become one of the key risks for portfolios in the coming period.

Join Lara Rhame, Chief U.S. Economist, and Andrew Korz, Director, Investment Research, as they unpack the macro drivers contributing to equity market concentration and share their opinions on how to navigate where the market might go next.  

Transcript excerpt

Lara Rhame (00:05):
Welcome back to the FireSide Podcast from FS Investments. I’m Lara Rhame, Chief U.S. Economist. Today’s episode of FireSide is going to focus on the equity market and specifically on the incredible concentration we are seeing. I’m joined for this discussion by Andrew Korz, a director on our research team. He is truly one of the engines driving our fantastic equity research, in conjunction with Brian Cho. Brian and Andrew and I had the pleasure of being a part of an incredible piece of research called “Concentration issues: A look at the top-heavy U.S. equity market.”

So, let me set the stage: We’re recording on June 14, 2023, and the S&P 500 is up—what should we call it, Andrew—about 14% today? That seems good, right? What’s the problem? Well, I’m going to kick off this podcast with a scary story—maybe a scary statistic. The top 10 stocks of the S&P 500—and these are names we all recognize and almost certainly we all own them—the market cap of these top 10 stocks is about $11 trillion. Which, in and of itself, is a staggering number. But it puts it into even greater context when you realize that that $11 trillion is equal to the entire market value of the whole U.K. market, plus the whole German market, plus the whole French equity market, plus the entire Japanese equity market. When I then add on that an equal weighted S&P 500 has been pretty much flat for most of the year, not only are you seeing this incredible concentration, but you’re also seeing this divergence of performance.
So, Andrew, I’ve hopefully scared everyone into listening to this podcast: Let’s get more perspective. I want to kick you off by understanding a little bit more of what’s going on here.

Andrew Korz (02:10):
I think you really kicked it off well there, Lara. I’m just going to kind of pile on with a couple more stats, just to really bring to the fore how remarkable the returns thus far this year have been. And, you know, I’m really excited about this podcast and this research because I think this is probably the most important question for most investors today.
So, just to kind of piggyback on what you were saying: The top 10 stocks in the S&P 500—2% of the firms in the index—they have together driven 11.5% of the total 14% return in the S&P 500 this year.

Lara Rhame:

Andrew Korz:
Right? They, together, are up a total of about 42% year to date. The S&P 490 is up about 3.5% or 4%. So that’s 42% versus 3.5% for the rest of the stocks.

Lara Rhame (3:06):
And I think this is an issue because we’ve always had a small number of stocks that are really dominant—that’s not new—but this level of concentration is what’s truly extraordinary.

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Andrew Korz, CFA

Executive Director, Investment Research

Lara Rhame

Chief U.S. Economist + Managing Director

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