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US Market Concentration Reaches Historic Highs Amid Tech Boom

Posted June 12, 2024 at 10:15 am
Finimize Newsroom

What’s going on here?

The concentration of the US equity market has hit historic levels, with the top 10 stocks now accounting for a record 35% of the market cap.

What does this mean?

The US equity market’s rising concentration is fueled by the ongoing AI and tech surge, especially in companies like Nvidia. Last year, the US was the fourth least concentrated market among the world’s 12 largest equity markets, beaten only by India, Japan, and China. Historically, high concentration periods have brought higher average returns, a trend noted by experts like Michael J. Mauboussin and Dan Callahan from Morgan Stanley Investment Management. This trend has global implications since the US market constitutes about 60% of the global equity market cap. Apple, Nvidia, and Microsoft alone make up 10.6% of this, with Nvidia heavily boosting the S&P 500’s returns this year. But while the returns can be substantial, this high concentration also raises the risk of market volatility, reminiscent of the dotcom boom and bust of the late 1990s.

Why should I care?

For markets: Tech giants lift the tides.

The influence of tech giants like Nvidia, Apple, and Microsoft is reshaping the US equity market. Their dominance has driven recent gains in the S&P 500, affecting investor sentiment worldwide. Since the US market holds a significant share of the global market cap, moves in these stocks can influence international markets. While concentration might promise higher short-term returns, it also ups the risk of significant downturns if these giants falter.

The bigger picture: A double-edged sword.

High market concentration has historically aligned with positive returns but can intensify downturns. Hendrik Bessembinder’s research shows that a select few companies account for the lion’s share of shareholder wealth creation, with US stocks adding over $55 trillion between 1926 and 2022. Yet, this concentration also means sharper declines during market downturns, as seen in the late 1990s dotcom bust. This scenario underlines the need for diversification and cautious optimism during periods of concentrated market gains.

Originally Posted June 12, 2024 – US Market Concentration Reaches Historic Highs Amid Tech Boom

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