The current environment highlights a lack of diversification and risk-spreading options
U.S. equity market concentration is, by some measures, now the strongest ever, raising justifiable concerns that having the entire market’s fate in the hands of so few stocks will only end in tears.
Out of a dozen of the world’s largest, the U.S. market was the fourth least concentrated, with the top 10 U.S. stocks accounting for almost 30% of national market cap. Only India, Japan and China were less concentrated, by that measure, while concentration was most extreme in Switzerland, France and Australia.
He notes that the top three U.S. companies Apple, Nvidia and Microsoft account for 10.6% of global market cap.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.
The results surrounding the late 1990s dotcom boom and 2000 bust may be particularly resonant given the tech-centric nature of today’s market concentration - compound annual returns in the 1994-1999 years were 23.5%, and just 3.6% from 2000 to 2013. What’s more, in the internet-based economy that has created more ‘winner take all’ outcomes, it is increasing.
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