For Better or Worse, The Stock Market is All About These 10 Stocks

The top 10 stocks have reached a weight not seen since the 1970s, with their market cap accounting for about one-third of the entire index.

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To say the S&P 500 Index is top-heavy would be a vast understatement.

The top 10 companies have reached a weight not seen since the 1970s, with their market capitalization accounting for about one-third of the entire index. Kudos to them for such fantastic gains, but there could be a downside to this much concentration. 

Cultivating Mass

The 10 relevant stocks are: Microsoft, Apple, Nvidia, Amazon, Meta, two classes of Alphabet, Berkshire Hathaway, Broadcom, and Eli Lilly. That’s it, that’s the list. And besides their market-cap contribution, those 10 are responsible for more than 25% of the index’s earnings.  

The House of Zuckerberg saw its revenue jump 27% year-over-year in the first quarter to $36.5 billion. Eli Lilly recently raised its 2024 guidance by $2 billion due to selling one of the most popular weight-loss drugs on the market. And Nvidia continues to break the matrix after reporting first-quarter revenue that more than tripled from a year earlier. Sure, maybe Apple hasn’t had the best 2024 so far with iPhone sales down and earnings taking a dip in the first quarter, but its stock is still up 4.9% in the last three months, just slightly behind the broader S&P 500.

But like we said, there might be a catch:

  • Most of the top 10 stocks are focused on developing — touting — their leadership in all things AI. And it didn’t take long for everyone else to get into the act: 179 companies in the S&P 500 referenced “AI” during their earnings calls for last year’s fourth quarter. Do we really think there are going to be 179 AI winners?
  • Historically, when market concentrations have surged it hasn’t spelled great fortune for the top 10 stocks. A study earlier this year by Hartford Funds showed that when market concentration in the top 10 stocks has risen to 30% or above (remember, we’re at 33%), the bottom 490 have historically outperformed 95% of the time over the next five years. In addition, a rise in concentration and valuation has often preceded a stretch of heightened volatility and larger drawdowns for the largest stocks. 

It’s Fine: But maybe we’re overthinking it. The S&P 500’s concentration is modest compared with other countries’ indices. On France’s CAC 40 or Italy’s FTSE-MIB, the top 10 stocks account for 60% and 73% of the index market caps, respectively. Plus, today’s top 10 might be a stronger breed, with “higher profit margins and returns on equity” than the weightiest companies during the mid-’70s and before the dot-com bubble, Goldman Sachs’ Ben Snider wrote in an analysis. So maybe we can all sit back and let the AI titans cook a little longer.

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