Nervous Investors as Three Giants Top 20% of the S & P 500
Three stocks now account for 20% of the S&P 500’s value. With this high concentration hitting extremes, some investors are nervous.
For the first time dating back to the year 2000, three U.S. stocks — Microsoft, Nvidia and Apple — account for more than 20% of the value of the S&P 500, according to Dow Jones Market Data. The top 10 stocks in the S&P 500 now make up a record-high 35% of the index.
As high as the concentration is for the S&P 500, it is even higher in the tech-heavy Nasdaq-100 index. As of June 5th market close, Microsoft, Nvidia, and Apple, comprised 41% of the Nasdaq-100’s value. Wow, three stocks in an index comprising almost half of that index performance and market cap is almost unthinkable
Is it possible that Strength in Nvidia and other megacaps has masked weakness in other areas of the market? Katie Stockton, founder of Fairlead Strategies, thinks it’s possible. In a report that she shared with MarketWatch Stockton stated that “small caps, midcaps and the Dow Jones Industrial Average DJIA — along with the equal-weighted version of the S&P 500— are all showing signs of deterioration”.
The divergence in relative price between the equal-weighted S&P 500 and its cap-weighted peer, has grown more extreme with the equal-weight index underperforming again this year. The ratio between the two recently touched its lowest level since 2009, according to analysts at Bank of America Global Research.
The last time so few stocks outperformed the index for two years in a row was 1998 and 1999, around the peak of the dot-com bubble.
But this high concentration doesn’t necessarily mean that we are headed for a 2000 like market crash. Investors would be hard-pressed to argue that the current market environment is similar to the dot-com era. The dominance of the largest stocks today largely reflects earnings and sales growth that dwarfs what other companies have seen. This is vastly different from the 2000 tech bubble which was characterized by very high stock prices for many tech companies that were piling up huge losses.
And, there is some historical data showing that rising concentration typically coincides with stronger returns .
As you can see from this chart provided by CounterPoint Global and Morgan Stanley which looks at data from 1950 through 2023, it appears that the S&P 500 has actually performed better during periods of rising concentration. But, its possible that we have already seen the benefits over the past 18 months with increasing concentration and large gains in the S&P 500.
The fact that so few stocks have contributed so much to the indexes’ advances has become a frequent complaint expressed by bull-market skeptics. Many believe that if the rally were to fizzle out, it would be because stocks like Nvidia, which have driven an outsize percentage of the S&P 500’s gains since early 2023, suddenly stop climbing.
This chart provided by Richard Bernstein Advisors illustrates how the percentage of S&P 500 stocks beating the index has remained unusually low in 2024, at about 30%, according to FactSet data. The S&P 500 is up 12.2% this year to date as of June 7th.
The market is, of course, forward-looking, and skeptics question how much longer companies like Nvidia, can keep up their breakneck pace of growth. After all, semiconductor companies have proven to be extremely cyclical in the past.
As always, we are keeping an eye on the market and positioning our portfolios to balance risk and return. Thank you for the trust and confidence that you have placed in me and my team. Feel free to give the office a call to talk to your advisor if you have any questions about your investments.