Tech-led market concentration ‘a myth’

A prevailing view that the US equities market has in recent years become perilously over-concentrated and dominated by just a few tech stocks is not borne out in evidence, according to an industry source.

Levels of stock concentration today in fact trend with historical norms, argues Grant Pearson, head of strategy and distribution at Insync, an Australian investment firm, with the US market found to exhibit far less concentration than its global peers.

Further, the belief that ‘tech stocks’ currently dominate well above historical norms is, he believes, also largely unfounded.

However, the perception of an over-concentration of tech stocks may, Pearson believes, also be an issue of mis-categorisation.

While it is often assumed most of the current Top 10 stocks fall into the ‘tech’ category, Meta and Google, he notes, are technically classified as ‘communication’ stocks, while Amazon falls within ‘consumer discretionary’.

Of the Top 10, only Apple, Microsoft and Nvidia should technically be classified as ‘tech’ stocks.

Increased concentration is widely seen as a negative for investors, reducing diversification opportunities, and exposing portfolios to sector- or stock-specific downturns.

Oil-dominated 80s still holds record

In an examination of stock concentration levels in US markets since 1980, assessed in five-year increments, Insync found an average of between 18%-29% market cap for the S&P 500’s Top 10 stocks.

While 2023 (the most recent period examined by Insync) is at the highest end of this range (29%), it is not significantly above the historical 40-year average.

In the early 1980s, for instance, when energy stocks dominated the heavy hitters, the Top 10 represented just over one-quarter (25.6%) of total market cap. In 2000, which had a more balanced mix of pharma, financial services, and technology firms, the Top 10 made up 23.7%.

The low point came just five years earlier in 1995, with the Top 10 holding a 17.7% weighting.

In terms of sector concentration, oil still holds the record, making up six of the Top 10 stocks in 1980, and representing 13.5% of market cap.

As at 2023, tech stocks made up just three of the Top 10 stocks. However, their collective market cap has increased proportionally, representing 15.6% of the S&P500’s total market cap.

“While the Top 10 percentage of the market remained in the [over] 20% range from the turn of the century, it wasn’t until after 2020 that tech stocks increased, and then to just three of the 10 positions,” Pearson said.

“By 2023, there were six sectors represented in the Top 10. With a year or so to go for the latest five-year period, it’s not a foregone conclusion that tech stocks will occupy the top slots.”

Nvidia’s sudden emergence last year may, Pearson warns, still prove just a flash in the pan; in 2023, it represented just 1.9% of total market cap. Today, it sits at just over 7%.

He noted that Nvidia’s “eye-watering” growth in the first half of 2024 has been a “relatively common occurrence over relatively shorter time periods for many companies”.

Stock concentration far worse outside US

Examining other major global bourses, Insync found that the US market, at least in recent history, holds one of the lowest stock concentration profiles.

“It is clear that stock concentration is not a US thing,” Pearson said. “If you’re really worried about concentration, avoid China and our own backyard.”

China’s top five stocks occupy 38% of its market, with its Top 10 accounting for 57%.

South Korea has 49% in its Top 10 (22% alone in this industrial megacorp, Samsung).

Australia, however, “is the worst of all”, says Insync, with the Top 10 making up around 60% of its entire market cap.

Major European markets, including the Top 10 of the UK (49%), Germany (58%), France (58%) and Italy (66%), are also notably more concentrated than the US.

Pearson concluded: “It always pays to check the facts and how the markets evolve over time, and these mistaken beliefs are the perfect example as to why.”