AAPL, NVDA and MSFT Account for 10.6% of Global Market Cap: It's Not All Doom and Gloom
The aggregate S&P 500 index has returned 15% since the start of the year, with five stocks accounting for 60% of the aggregate index’s year to date return - $Microsoft(MSFT.US$ , $NVIDIA(NVDA.US$ , $Alphabet-C(GOOG.US$ , $Alphabet-A(GOOGL.US$, $Amazon(AMZN.US$ and $Meta Platforms(META.US$.
U.S. equity market concentration is now the strongest ever by some measures, which is raising justifiable concerns. But it's not necessarily an accident waiting to happen.
Average returns tend to be higher when concentration is rising rather than falling
Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, noted that the top three U.S. companies $Apple(AAPL.US$ , $NVIDIA(NVDA.US$ and $Microsoft(MSFT.US$ account for 10.6% of global market cap.
"Concentration is extremely high now, unusually high. But when these companies are doing well, you're a happy camper," he says.
Indeed, Michael J. Mauboussin and Dan Callahan at Morgan Stanley Investment Management find that since 1950, the S&P 500 has delivered above-average returns in periods when concentration was rising and below-average returns when concentration was falling.
Source: Morgan Stanley
Mauboussin and Callahan estimate that in the decade from 2014 to 2023, the top 10 U.S. stocks' market cap averaged 19% but their share of overall U.S. earnings was 47%. Last year, their market cap and share of overall profits rose to 27% and 69%, respectively.
Moreover, the tech-concentration boom is supported by strong fundamentals
The five mega-caps - Microsoft, Nvidia, Alphabet, Amazon and Meta Platforms - posted 1Q year-over-year EPS growth of 84% vs 5% for the typical S&P 500 stock, according to analysts at Goldman Sachs. This prompted them to raise their 2024 EPS forecasts by 38% for these five tech stocks. In contrast, the profit forecast for the other 495 stocks in the index have been reduced by 5%.
While the current concentration of wealth, earnings, and market cap 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, not a bug.
What's more, in the internet-based economy that has created more 'winner take all' outcomes, it is increasing.
"It can be anticipated that earnings creation is likely to be concentrated in a relatively few firms during future decades as well," Mauboussin concludes.
Mooers, do you think the high concentration in US stocks is a sign of a bull market, or do you believe that the overcrowding in US stocks could lead to a risk of a pullback in the future?
Source: Morgan Stanley, Reuters, Goldman Sachs
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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Jack Liang727 : bull bull
Adam Andrew : Right now, this trend is going to continue as long as the economy is thriving and people have money in their pockets. Tech is and always is going to be the future. The faster people accept that, the more gains you will have in the coming few decades.
Judy Dula : I am glad to be starting and investing in stock.
DudeThatsDerpy : Market crash soon.
BullBearHenry DudeThatsDerpy : Any idea when will the crash be here?
DudeThatsDerpy BullBearHenry : It's impossible to know exactly. Technically speaking one could begin within the next few weeks to months. I believe there will need to be a massive negative catalyst to kick everything off, although recession or war could be it.
73047625 : What goes up....I hope you are up when you NEED to hit the cash register, and weather the lows when you don't need the cash. Think the crash in 2019/2020 Covid outbreak...and the impressive recovery, the 2008 Bank crises and recovery. As long as we don't have World War 3 or a meteor black Swan event we are ok...and if we did money would not matter anyway.
BullBearHenry DudeThatsDerpy : Thanks for your clarification. Personally I’ll never say ‘market crash soon’ but I’ll tell people to look out for catalyst causes, market extremes (eg super high market PE, etc). We also do not know when a flash crash may occur!
DudeThatsDerpy BullBearHenry : That's very true.