Jamie McGeever
ORLANDO, Fla. (Reuters) – U.S. stock market concentration is, by some measures, the worst it has ever been, raising justifiable fears that putting the fate of the entire market in the hands of so few stocks will only end in disaster.
The current situation highlights the lack of diversification and risk-sharing options, fuels bubble speculation, and makes it difficult for active and even passive managers to outperform the benchmark index when a powerful force is controlled by just a handful of stocks.
But this isn’t necessarily an accident waiting to happen.
From a global historical perspective, Wall Street’s performance today is not unprecedented: Average returns tend to be higher when concentration rises rather than falls, and the ongoing tech boom is supported by strong fundamentals.
Those were the findings, among other things, in an in-depth analysis of market concentration published last week by Michael J. Mauboussin and Dan Callahan of Morgan Stanley Investment Management.
Remarkably, at the end of last year the US stock market was far from the most concentrated among the world’s leading stock markets.
Of the world’s dozen largest, the U.S. market was the fourth most concentrated, with the top 10 U.S. stocks accounting for nearly 30% of the nation’s market capitalization. By this measure, only India, Japan and China had lower concentrations, while Switzerland, France and Australia had the highest concentrations.
Since then, America’s position on this list will change in light of the ongoing boom in artificial intelligence and technology, especially in Nvidia (NASDAQ:) stock. Analysts say the top 10 stocks now account for a record 35% of the U.S. market capitalization.
But it places the current US picture in a broader context.
Mauboussin and Callahan note a 2020 study that found that across 47 stock markets around the world between 1989 and 2011, the average weighting of the top 10 stocks was 48%. This paper was in no way praising tight markets, but, again, it puts the current frenzy over Wall Street tightness into a less troubling historical context.
“The US stock market, even after a decade of increasing concentration, remains one of the most diversified markets in the world,” write Mauboussin and Callahan.
Of course, the top one, three or 10 largest US stocks mean much more to the world than similar stocks elsewhere – the market capitalization of US stocks last year was about 60% of the global stock market capitalization, and now, no doubt, even higher. .
A FEATURE, NOT A BUG
Of all the eye-popping statistics currently being discussed about the extent of market concentration, Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, provides perhaps the most remarkable.
He notes that the top three US companies Apple (NASDAQ:), Nvidia and Microsoft (NASDAQ:) account for 10.6% of the global market capitalization.
But is this force justified? Quite possible.
Mauboussin and Callahan estimate that in the decade from 2014 to 2023, the market capitalization of the 10 largest U.S. stocks averaged 19%, but their share of total U.S. returns was 47%. Last year, their market capitalization and share of total profits rose to 27% and 69%, respectively.
Silverblatt estimates that Nvidia, whose shares are up more than 140% this year, accounts for a third of the company’s total gains of 13% year-to-date.
“The concentration is now extremely high, unusually high. But when these companies do well, you are a happy tourist,” he says.
Indeed, Mauboussin and Callahan found that since 1950, the S&P 500 has delivered above-average returns during periods when concentration rose and below-average returns when concentration fell.
The results associated with the dot-com boom of the late 1990s and the crash of 2000 may be particularly resonant given the technological nature of today’s market concentration: compound annual returns from 1994 to 1999 were 23.5%, and from 2000 to 2013 – only 3.6%.
Admittedly, this latest period includes the Great Financial Crisis, but it provides a glimpse of what might happen as the concentration in the high-tech market dissipates. Be careful what you wish for?
While the current concentration of wealth, income and market capitalization in the hands of so few stocks is unprecedented by many measures, increased concentration appears to be a feature of the U.S. stock market rather than a bug.
Last year’s study, “Increasing Shareholder Wealth, 1926-2022,” by Hendrik Bessembinder, a finance professor at Arizona State University, found that the trend toward increasing concentration has been going on for decades.
Moreover, in the Internet economy, which has created more winner-take-all outcomes, it is increasing.
Bessembinder found that investing in U.S. public stocks increased shareholder wealth (SWC) cumulatively by more than $55 trillion from 1926 to 2022, although investing in more than half—58.6% of 28,114 individual stocks—reduced shareholder wealth.
The top 11 firms account for just over 20% of net SWC volume, the top 23 firms account for just over 30%, and the top 42 firms account for just over 40%.
The number of companies that account for half of total net wealth since 1926 has fallen from 90 in 2016 to 83 in 2019 and to 72 as of 2022, Bessembinder said.
“We can expect that shareholder wealth creation is likely to remain concentrated in a relatively small number of firms for decades to come,” he concludes.
(The views expressed here are those of the author, a Reuters columnist.)
(Jamie McGeever; Editing by Andrea Ricci)