By some measurements, the U.S. stock market has not been this top-heavy in over 100 years and has recently experienced one of its greatest gains in decades, raising fears of a large drop.
These anxieties may be overblown, according to history. After severe concentration, the S&P 500 (.SPX), opens new tab climbed more often, and rallies like the one over the past four months always result in 12 months of double-digit percentage returns.
No two macro or market circumstances are alike. The post-2008 and post-pandemic world has taught investors that past performance does not guarantee future results.
US equity market concentration has not been this high in decades, with the 10 largest stocks accounting for 33% of S&P 500 market size. A narrower assessment by Goldman Sachs researchers suggests market concentration has never been stronger.
Twelve months following the 1973 and 2000 crashes, S&P 500 returns declined 23% and 18%. In the 12 months after excessive concentration in 1932, 1939, 1964, 2009, and 2020, average returns were 23% higher.
"Historical episodes of elevated concentration were followed by S&P 500 rallies more often than corrections," says Goldman Sachs senior analyst Ben Snider.
Comparisons to 2000 abound, but optimism persists. Snider calculates that the median top-10 stock valuation is much lower than in 2000, and the median top-10 market cap constituent is roughly three times more profitable than in 2000 or 1973. Typical S&P 500 stocks are cheap. Truist Advisory Services analysts estimate that the S&P 500 Equal Weight Index trades at a 20% discount to the standard S&P 500, which is dominated by giant tech and growth businesses.
After underperforming, the equal-weighted index is stabilizing, and they recommend diversifying among large caps with exposure to it. Near "extreme undervaluation" area, smaller caps are trading even lower. Another industry ready to share the load if earnings momentum ramps up.
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