Stock Market Concentration at Multi-Decade Highs

The stock market has experienced its steepest concentration rise in 60 years, with a small number of stocks driving most returns (Nvidia ring a bell?).

This trend is a not an entirely surprising byproduct of the massive migration from “Active” to “Passive” funds since the Great Financial Crisis…which has further been amplified with the rapid shift from a zero-interest-rate policy (ZIRP) to “higher-for-longer”.

A recent piece from JP Morgan notes: “Sharply higher rates and a slower growth outlook have resulted in an outflow from long-duration and cyclical assets. Mega-cap companies have been beneficiaries of this market rotation, as they offer attractive liquidity, sustainable growth, and much stronger pricing power,

This shift has led to a significant divergence in index weight concentration between mega-cap stocks and the next tier of large caps. Currently, the top 10 U.S. stocks by market cap make up almost 30% of the total equities market:

Source: JP Morgan Equity Strategy;


Interestingly, at the peak of the dot com mania (way back in 2000), only 3 of the top 6 companies were Tech giants…

This is the proverbial “dance while the music is playing” market…which any investor will know is difficult because the opportunity cost of “missing out” can be material.  That said, it’s also not prudent to chase higher returns because of “FOMO”. 

A recent piece from Morgan Stanley provides an interesting historical perspective of S&P returns during periods of rising vs. falling concentrations. Note, the line shows the S&P concentration (i.e. the weighting of the top 10 stocks) and the numbers over the line show the annualized S&P 500 return during those periods (designed by either red or green):

Not surprisingly, periods of rising correlation appear to correspond to higher equity market returns. Given that rising concentrations among stocks are also correlated with a strong positive momentum bias to equity returns, this is to be expected.

The question now is: “What happens if we finally get a period of falling concentration?”

Markets like this are why we believe in a rules-based rotational strategy to provide investors with an exposure that has the ability to automatically rotate into more defensive sectors based on market performance.

Markets like this are exactly why (we believe) it’s important for investors to have a plan to respond to the market before the music stops playing.  That doesn’t mean you’ll be able to get out at the top…but it does mean you can potentially have a better shot of navigating turbulent waters before the storm comes.

The statements herein are based upon IDX’s opinions and the data available at publication. They are subject to change at any time without notice. This communication does not constitute investment advice and is for educational purposes only. Neither the information nor any opinions expressed herein should be construed as a solicitation or a recommendation by IDX or its affiliates to buy or sell securities or investments or hire any specific manager. IDX prepared this utilizing information it believes to be reliable. It is important to remember that risks are inherent in any investment. Past performance is not a guarantee of future results. All investments are subject to risk, including the loss of principal.