JPMorgan is the latest Wall Street outfit to warn that the S&P 500 is increasingly dominated by a small number of mega-cap companies. The bank’s 2024 Long-Term Capital Market Assumptions report is optimistic about stocks’ long-term outlook, but says “extreme concentration” poses short-term risks.
The 10 largest S&P 500 companies now account for over 30 per cent of the index – about three standard deviations away from historic norms. This is partly justified by fundamentals, says JPM, as many of the top stocks are highly profitable growth companies.
Nevertheless, the “magnitude of the index concentration” and the dominance of one sector – technology – is “cause for concern”, given history suggests previous episodes of extreme concentration signalled a subsequent market decline.
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US bulls might quibble with this point. Yes, that was true in 2000, when the top-heavy S&P 500 fell into a long bear market, but this is just one example. Still, it’s fair to say an index dominated by a handful of stocks is at risk if a few such companies fall short of expectations.
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One potential remedy: look outside the US. Non-US developed markets are largely characterised by lower concentration and greater sector diversification, says JPM. The top 10 stocks of the MSCI Ex-US index account for just 13.2 per cent of the index – a far cry from the increasingly top-heavy US market.
