There seem to be a lot of people wringing their hands about how concentrated today’s stock market is. More specifically, the worry is over how a few stocks make up a large amount of the benchmark S&P500. It is true that the current market is the most concentrated it has been in the past 25 years. As of January 1 of this year, the top 10 stocks in the S&P500 make up 34% of the index. The top 5 stocks, AAPL, MSFT, GOOG, GOOGL, and AMZN, comprise 24% of the S&P500 (see Table 1 below).
Is this unhealthy? Is this risky?
Does it portend a potential decline in stock prices?
….Spoiler – the answer is “no”.
There is a simple way to answer this question. TPA looked at the concentration of stocks in the S&P500 at the start of each year from 1999 to the present. We then calculated the average high, and low concentrations for the S&P500. The average from 1999 to 2024 is 22.94%. The high and low are 34% and 18%, respectively.
We then measured the performance of the S&P500 for 3, 6, 9, and 12 months following the concentration measurement. The average performance for 6 months and 12 months for all years is +2.33% and +7.18%.
Now, we calculated the performance for only those years in which the concentration of the Top 10 stocks in the S&P500 was above the 25-year average or 22.94%. There were 10 years in which the top 10 stocks in the S&P500 comprised more than 22.94% of the index. Those years were 2000, 2001, 2002, 2003, 2009, 2019, 2020, 2021, 2022, and 2023. The average 6-month and 12-month performance for the highly concentrated years was +1.36% and +8.01%. The 12-month average performance was actually better for concentrated years. (See table 2 below)
Although concentrated years did include the years associated with the TECH bubble bursting (2000-2002), it did not include the worst year of the Housing Crisis (2008).
We have also included all the historical performance and concentration data in the tables below.
TPA’s conclusion: The historical evidence does not indicate that market concentration is a bad thing or indicate lower prices are lurking ahead.
