US stock market concentration is historically extreme
The current concentration of the US stock market in a handful of technology names is at its highest level since 1927, creating potential vulnerability for index investors.
The argument
The speaker noted that the top seven stocks (the 'Magnificent Seven') make up 36% of the S&P 500 and 32% of the total US market. While this concentration is historically extreme and mirrors past bubbles like Canada's Nortel in 2000, the speaker argued that the relationship between market concentration and future returns is historically noisy and often overblown.
The thesis, stress-tested
✓ What validates it
- ✓Underperformance of market-cap-weighted indexes relative to equal-weighted indexes
- ✓Earnings deceleration or capital expenditure cuts among the Magnificent Seven
▸ Risks discussed
- ▸A decline in the top seven stocks could disproportionately drag down the entire US market
- ▸Historical precedents of extreme single-stock concentration (e.g., Nortel in Canada) resulted in severe index-level drawdowns
Hear it yourself
"Now either way, whether we look at S and P 500 or total market, that is the most extreme level of index concentration in US market history going back to 1927, which is where I have data going back to. They're also nearing valuations are so concentration highest it's ever been, back to 1927."
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