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Concentration Part II

June 18, 2024 | Posted in: Insights, Investing

My recent blog pointed out that 35% of the S&P 500 capitalization now consists of just ten stocks, a level that far exceeds the 2000 Tech Bubble reading of 27%. Let’s examine a few more statistics that demonstrate the extraordinary dominance of large American technology companies.

As indicated, year-to-date returns through March for large growth stocks have crushed both mid and small cap growth stocks as well as value companies of all sizes. And, this trend has continued through today. Similarly, Non-U.S. stocks significantly lagged with a return of just 4.7% for the quarter. As a result of significant outperformance, take a look at current P/E ratios for U.S. stocks as compared to long term averages:

Note that growth stocks are selling at 125% to 142% of twenty-year averages whereas value stocks are at only a slight premium to historical levels. (Despite the fact that the S&P 500 is selling about 25% above its long-term P/E/)
Here is one more.

This chart shows that Non-U.S. stocks are currently selling at a 34% discount to the U.S. market as compared to the long term average of a 16.7% discount.

No matter how you cut it, investors are totally in love with a small number of U.S. growth companies which raises a number of interesting questions. Is this healthy for the capital markets or are we experiencing a bubble? Can these companies remain dominant and continue to enjoy strong growth? Will there eventually be a reversion to the mean and what will cause a change in the prevailing winds?