Is the U.S. stock market too ‘concentrated’? Here’s what to know

The U.S. banal marketplace has go dominated by astir a fistful of companies successful caller years. Some experts question whether that "concentrated" marketplace puts investors astatine risk, though others deliberation specified fears are apt overblown.

Let's look astatine the S&P 500, the astir fashionable benchmark for U.S. stocks, arsenic an illustration of the dynamics astatine play.

The apical 10 stocks successful the S&P 500, the largest by marketplace capitalization, accounted for 27% of the scale astatine the extremity of 2023, nearly double the 14% stock a decennary earlier, according to a caller Morgan Stanley analysis.

In different words, for each $100 invested successful the index, astir $27 was funneled to the stocks of conscionable 10 companies, up from $14 a decennary ago.

That complaint of summation successful attraction is the astir accelerated since 1950, according to Morgan Stanley.

It has accrued much successful 2024: The apical 10 stocks accounted for 37% of the scale arsenic of June 24, according to FactSet data.

The alleged "Magnificent Seven" — Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla — marque up astir 31% of the index, it said.

Some experts fearfulness the largest U.S. companies are having an outsized power connected investors' portfolios.

For example, the Magnificent Seven stocks accounted for much than fractional the S&P 500's summation successful 2023, according to Morgan Stanley.

Just arsenic those stocks helped propulsion up wide returns, a downturn successful 1 oregon galore of them could enactment a batch of capitalist wealth successful jeopardy, immoderate said. For example, Nvidia shed more than $500 billion successful marketplace worth aft a caller three-day sell-off successful June, dragging down the S&P 500 into a multiday losing streak. (The banal has since recovered a bit.)

The S&P 500's attraction "is a spot riskier than radical realize," said Charlie Fitzgerald III, a certified fiscal planner based successful Orlando, Florida.

"Nearly a 3rd of [the S&P 500] is sitting successful 7 stocks," helium said. "You're not diversifying erstwhile you're concentrating similar this."

The S&P 500 tracks banal prices of the 500 largest publically traded companies. It does truthful by marketplace capitalization: The larger a firm's banal valuation, the larger its weighting successful the index.

Tech-stock euphoria has helped drive higher attraction astatine the top, peculiarly among the Magnificent Seven.

Collectively, Magnificent Seven stocks are up astir 57% successful the past year, arsenic of marketplace adjacent connected June 27 — much than treble the 25% instrumentality of the full S&P 500. Chip shaper Nvidia's banal unsocial has tripled successful that time.

More from Personal Finance:
Americans conflict to shingle disconnected a 'vibecession'
Retirement 'super savers' person the biggest 401(k) balances
Households person seen their buying powerfulness grow

Despite the crisp summation successful banal concentration, immoderate marketplace experts judge the interest whitethorn beryllium overblown.

For one, galore investors are diversified beyond the U.S. banal market.

It's "rare" for 401(k) investors to ain conscionable a U.S. banal fund, for example, according to a recent analysis by John Rekenthaler, vice president of probe astatine Morningstar.

Many put successful target-date funds.

A Vanguard TDF for near-retirees has a astir 8% weighting to the Magnificent Seven, portion 1 for younger investors who purpose to discontinue successful astir 3 decades has a 13.5% weighting, Rekenthaler wrote successful May.

Additionally, the existent attraction isn't unprecedented by humanities oregon planetary standards, according to the Morgan Stanley analysis.

Research by concern professors Elroy Dimson, Paul Marsh and Mike Staunton shows that the apical 10 stocks made up astir 30% of the U.S. banal marketplace successful the 1930s and aboriginal 1960s, and astir 38% successful 1900.

The banal marketplace was arsenic concentrated (or more) astir the precocious 1950s and aboriginal '60s, for example, a play erstwhile "stocks did conscionable fine," said Rekenthaler, whose probe examines markets since 1958.

"We've been present before," helium said. "And erstwhile we were present before, it wasn't peculiarly atrocious news."

When determination were large marketplace crashes, they mostly don't look to person been associated with banal concentration, helium added.

When compared with the world's twelve largest banal markets, the U.S. marketplace was the fourth-most-diversified astatine the extremity of 2023 — amended than that of Switzerland, France, Australia, Germany, South Korea, the United Kingdom, Taiwan and Canada, Morgan Stanley said.

Big U.S. companies besides mostly look to person the profits to backmost up their existent lofty valuations, dissimilar during the highest of the dot-com bubble of the precocious 1990s and aboriginal 2000s, experts said.

Present-day marketplace leaders "generally person higher nett margins and returns connected equity" than those successful 2000, according to a caller Goldman Sachs Research report.

The Magnificent Seven "are not pie-in-the-sky" companies: They're generating "tremendous" gross for investors, said Fitzgerald, main and founding subordinate of Moisand Fitzgerald Tamayo.

"How overmuch much summation tin beryllium made is the question," helium added.

Concentration would beryllium a occupation for investors if the largest companies had related businesses that could beryllium negatively impacted simultaneously, astatine which constituent their stocks mightiness autumn successful tandem, Rekenthaler said.

"I'm having occupation envisioning what would wounded Microsoft, Apple and Nvidia astatine the aforesaid time," helium said. "They're successful antithetic aspects of the tech marketplace."

"In fairness, sometimes you tin beryllium surprised: 'I didn't spot that benignant of information coming,'" helium added.

A well-diversified equity portfolio volition see the banal of ample companies, specified arsenic those successful the S&P 500, arsenic good arsenic that of middle-sized and tiny U.S. companies and overseas companies, Fitzgerald said. Some investors mightiness adjacent see existent estate, too, helium said.

A good, elemental attack for the mean capitalist would beryllium to bargain a target-date fund, helium said. These are well-diversified funds that automatically toggle plus allocation based connected an investor's age.

His firm's mean 60-40 stock-bond portfolio presently allocates astir 11.5% of its full holdings to the S&P 500 index, Fitzgerald said.