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Concentration

June 15, 2024 | Posted in: Insights, Investing

As shown below, almost 35% of the value of the S&P 500 is represented by just ten stocks (Microsoft, Apple, Nvidia, Amazon, Meta, Alphabet A and C, Berkshire Hathaway, Eli Lilly, and JP Morgan), a level of concentration that far surpasses the 27% reached during the Tech Bubble of 2000.

As further evidence of the dominance of these large stocks, indexes of small capitalization and Non-US stocks are only up 2.7% and 7.1%, respectively, for the year through May as compared to 11.3% for the S&P 500.

Whether this level of concentration is troublesome or not is a subject of considerable debate. Market watchers generally view a market that lacks breadth as risky and many of these companies sell at lofty valuations. On the other hand, these are dominant companies that are financially strong. Further, the continuous shift in assets toward index funds reinforces concentration because 35% of newly invested dollars will necessarily be funneled into the top ten stocks.

One thing that we do know is that concentration makes it extremely difficult for active equity managers to outperform the index since most would consider it highly imprudent to concentrate their portfolios in just ten stocks that are largely focused on a single sector, technology.