Executive Summary
The Story So Far
Why This Matters
Who Thinks What?
Investors are scrutinizing record-high stock market concentration and its associated risks, particularly as Wall Street reaches new peaks and several “Magnificent Seven” U.S. tech giants report earnings this week. However, analysis from market strategists suggests that the level of equity market concentration in the United States may not be as extreme as perceived when compared to global standards.
U.S. Market Concentration
The debate around market concentration has intensified over the past two years, significantly fueled by the rapid growth of Nvidia. The chipmaker’s market capitalization has quadrupled since 2023, reaching $4.5 trillion, which has propelled the “Magnificent Seven” tech companies’ share of the S&P 500 to over 30%.
Global Comparison
Despite these figures, the U.S. market exhibits less concentration than many other developed and emerging economies, according to research. Michael J. Mauboussin and Dan Callahan of Morgan Stanley found that among a dozen of the world’s largest stock markets, the U.S. is the fifth-least concentrated.
At the end of September, the top 10 U.S. stocks constituted 33.8% of the total market capitalization. This level of concentration was lower than in countries such as France, Taiwan, and Switzerland. Conversely, India, Japan, China, and Canada demonstrated even lower concentration levels.
Taiwan stands out as an extreme example, largely due to Taiwan Semiconductor Manufacturing Co (TSMC), the world’s largest producer of advanced chips. TSMC alone accounts for more than 40% of Taiwan’s entire stock market capitalization.
Emerging Markets Perspective
Research published this year by Lena Tsymbaluk and Michael Born of Morningstar indicates that equity market concentration is intensifying in key emerging economies, primarily driven by technology. Their analysis focused on China, Brazil, South Korea, Taiwan, and India, which collectively represent 80% of the Morningstar Emerging Markets Target Market Exposure Index.
At the close of last year, the top five stocks represented 27% of India’s market, 35% in China, 46% in South Korea, 47% in Brazil, and 72% in Taiwan. For comparison, the equivalent shares in Morningstar’s U.S., UK, and global Target Market Exposure indexes were 26%, 17.5%, and 33%, respectively. This data suggests that U.S.-based investors seeking diversification abroad should be aware of potentially higher concentration risks in certain international markets.
Implications of Concentration
High market concentration poses challenges for active fund managers, as it becomes difficult to “beat the market” when a few mega-cap stocks drive outsized gains. Morningstar data reveals that only 8% of surviving active funds in the U.S. large-cap blend category outperformed their passive counterparts over the decade ending June 2024.
Concerns also persist about increased systemic risk, with some market observers fearing a potential “tech bubble” or “artificial intelligence bubble” burst. However, these outcomes have not yet materialized, supported by the strong earnings of major tech companies and a prevailing “buy the dip” investor mentality.
The current market environment presents a classic risk-reward dilemma for investors. While diversifying can mitigate the impact of a sharp reversal in tech stocks, maintaining exposure to the largest names allows participation in their continued returns. Some analysts suggest that the greater risk at present may be anticipating a market reversal too soon, adhering to the maxim that “being too early is the same as being wrong.”
