📊Here’s What History Tells Us About Market Concentration
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Here’s What History Tells Us About Market Concentration
Current levels of stock market concentration, while historically high, are supported by fundamental corporate performance, suggesting that concerns about diversification loss and market instability may be overstated.
The concentration of market capitalization among the top companies in the U.S. has varied significantly over the past century. Notably, concentration peaked at 30% in 1963, declined to 12% in 1993, and has recently risen to 27% by 2023. This fluctuation highlights periods of both excessive concentration and diversification, reflecting broader economic and market trends.
Are Global Markets More Diversified than the U.S.?
When comparing the U.S. market to other global markets, it becomes evident that the U.S. remains relatively diversified. For instance, while the top 10 stocks constitute 27% of the U.S. market capitalization, similar metrics in other countries can exceed 50%. This comparison underscores that the U.S. market, despite its concentration, maintains a level of diversification comparable to global standards.
Are Corporate Profits Justifying Market Concentration?
Economic profit, defined as the return on invested capital (ROIC) minus the weighted average cost of capital (WACC), provides a robust measure of value creation. The top 10 companies in the U.S. market contributed significantly to total economic profit, justifying their large market capitalizations. For example, in 2023, these companies accounted for 69% of the total economic profit, suggesting that their dominance is backed by substantial value creation.
Key Strategies for Active Equity Managers in 2024
Rising concentration poses challenges for active managers, who typically hold portfolios with smaller average market capitalizations compared to benchmarks like the S&P 500. As large-cap stocks outperform, active managers find it increasingly difficult to generate excess returns. However, the fundamental strength of these large-cap companies implies that their market leadership is not merely speculative but rooted in superior economic performance.
Conclusion
Drawing together the findings, it is clear that the recent rise in stock market concentration reflects both historical precedents and strong corporate fundamentals. While concerns about diversification are valid, the current levels of concentration are not without justification. Active managers must navigate this landscape by recognizing the enduring economic strengths of the market leaders. Ultimately, the evolution of market concentration will continue to shape investment strategies and market dynamics.
References
Mauboussin, M. J., & Callahan, D. (2024). Stock Market Concentration: How Much Is Too Much? Counterpoint Global Insights, Morgan Stanley
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