To The Moon

AAPL, NVDA and MSFT Account for 10.6% of Global Market Cap: It's Not All Doom and Gloom

The aggregate S&P 500 index has returned 15% since the start of the year, with five stocks accounting for 60% of the aggregate index's year to date return - $Microsoft(MSFT.US)$, $NVIDIA Corp(NVDA)$   , $Alphabet(GOOG)$   , $Alphabet(GOOGL)$  , $Amazon.com(AMZN)$   and $Meta Platforms, Inc.(META)$ .

U.S. equity market concentration is now the strongest ever by some measures, which is raising justifiable concerns. But it's not necessarily an accident waiting to happen.

Average returns tend to be higher when concentration is rising rather than falling

Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, noted that the top three U.S. companies $Apple(AAPL.US)$ , $NVIDIA(NVDA.US)$ and $Microsoft(MSFT.US)$ account for 10.6% of global market cap.

"Concentration is extremely high now, unusually high. But when these companies are doing well, you're a happy camper," he says. 

Indeed, Michael J. Mauboussin and Dan Callahan at Morgan Stanley Investment Management find that since 1950, the S&P 500 has delivered above-average returns in periods when concentration was rising and below-average returns when concentration was falling.

Mauboussin and Callahan estimate that in the decade from 2014 to 2023, the top 10 U.S. stocks' market cap averaged 19% but their share of overall U.S. earnings was 47%. Last year, their market cap and share of overall profits rose to 27% and 69%, respectively.

Moreover, the tech-concentration boom is supported by strong fundamentals

The five mega-caps - Microsoft, Nvidia, Alphabet, Amazon and Meta Platforms - posted 1Q year-over-year EPS growth of 84% vs 5% for the typical S&P 500 stock, according to analysts at Goldman Sachs. This prompted them to raise their 2024 EPS forecasts by 38% for these five tech stocks. In contrast, the profit forecast for the other 495 stocks in the index have been reduced by 5%.

While the current concentration of wealth, earnings, and market cap in the hands of so few stocks is unprecedented by many measures, increased concentration appears to be a feature of the U.S. stock market, not a bug.

What's more, in the internet-based economy that has created more 'winner take all' outcomes, it is increasing.

"It can be anticipated that earnings creation is likely to be concentrated in a relatively few firms during future decades as well," Mauboussin concludes.

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