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How Magnificent 7 Affects S&P 500 Stock Market Concentration
Jensen Huang, co-founder and CEO of Nvidia Corp., introduces the new Blackwell GPU chip at the Nvidia GPU Technology Conference on March 18, 2024.
David Paul Morris/Bloomberg via Getty Images
The U.S. stock market has been dominated by a handful of companies for the past few years. Some experts wonder whether this “concentrated” market puts investors at risk, but others say those fears are probably overblown.
Let's look at it S&P 500the most popular benchmark index for U.S. stocks, as an illustration of the dynamics at work.
The top 10 stocks in the S&P 500, the largest by market capitalization, accounted for 27% of the index at the end of 2023, almost double the 14% share a decade earlier, according to a recent analysis by Morgan Stanley.
In other words, for every $100 invested in the index, about $27 was channeled into the stocks of just 10 companies, compared to $14 a decade ago.
This rate of increase in concentration is the fastest since 1950, according to Morgan Stanley.
The rise was even stronger in 2024: The top 10 stocks accounted for 37% of the index as of June 24, according to FactSet data.
The so-called “Magnificent Seven” Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia And You're here represent about 31% of the index, he said.
“A little riskier than people think”
Some experts worry that America's largest companies have an outsized influence on investors' wallets.
For example, stocks of the “Magnificent Seven” accounted for more than half of the S&P 500’s gain in 2023, according to Morgan Stanley.
The S&P 500's concentration “is a little riskier than people think,” said Charlie Fitzgerald III, a certified financial planner based in Orlando, Florida.
“Nearly a third of [the S&P 500] “He’s sitting on seven stocks,” he said. “You don’t diversify when you focus like that.”
Why Inventory Concentration May Not Be a Problem
The S&P 500 Index tracks the stock prices of the 500 largest publicly traded companies. It does so based on market capitalization: the higher a company's market valuation, the greater its weighting in the index.
The euphoria of technology stocks has contributed to greater concentration at the top, particularly among the Magnificent Seven.
Collectively, shares of the Magnificent Seven are up about 57% over the past year, more than double the 25% return of the entire S&P 500 as of the market close on June 27. Shares of chipmaker Nvidia alone have tripled in that time.
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Despite the sharp increase in stock concentration, some market experts believe this concern may be overblown.
On the one hand, many investors are diversifying their activities beyond the U.S. stock market.
It is “rare” for 401(k) investors to own only a U.S. stock fund, for example, according to a recent analysis by John Rekenthaler, vice president of research at Morningstar.
Many invest in target date funds.
A Vanguard TDF for near-retirees has a weighting of about 8% to the Magnificent Seven, while a TDF for younger investors aiming to retire in about three decades has a weighting of 13.5%, Rekenthaler wrote in May.
There is a precedent for this market concentration.
Moreover, the current concentration is not unprecedented by historical or global standards, according to Morgan Stanley's analysis.
A study by finance professors Elroy Dimson, Paul Marsh and Mike Staunton shows that the top 10 stocks accounted for about 30% of the U.S. stock market in the 1930s and early 1960s, and about 38% in 1900.
The stock market was just as concentrated (or more so) in the late 1950s and early 1960s, for example, a period when “stocks were doing very well,” said Rekenthaler, whose research has examined markets since 1958.
“We've been there before,” he said. “And when we've been there before, it wasn't particularly bad news.”
When big stock market crashes occur, they generally don't seem to have been associated with stock concentration, he added.
Compared to the world's 12 largest stock markets, the U.S. market was the fourth most diversified at the end of 2023, ahead of Switzerland, France, Australia, Germany, South Korea, the United Kingdom, Taiwan and Canada, Morgan Stanley said.
“Sometimes you can be surprised”
Large U.S. companies also generally appear to be generating enough profits to support their current high valuations, unlike at the height of the dot-com bubble in the late 1990s and early 2000s, experts said.
Current market leaders “generally have higher profit margins and return on equity” than in 2000, according to a recent report from Goldman Sachs Research.
The Magnificent Seven “are not utopian businesses”: they generate “enormous” revenues for investors, said Fitzgerald, director and founding member of Moisand Fitzgerald Tamayo.
“The question is to what extent further gains can be made,” he added.
You don't diversify when you focus like that.
Charlie Fitzgerald III
Certified Financial Planner based in Orlando, Florida
Concentration could be a problem for investors if the largest companies had related businesses that could be negatively affected simultaneously, in which case their stocks could fall in tandem, Rekenthaler said.
“I have a hard time imagining what could hurt Microsoft, Apple and Nvidia at the same time,” he said. “They're in different parts of the technology market.”
“To be honest, sometimes you can be surprised: 'I didn't see this kind of danger coming,'” he added.
A well-diversified stock portfolio, Fitzgerald said, would include stocks of large companies, such as those in the S&P 500, as well as stocks of small and mid-sized U.S. and foreign companies. Some investors might even include real estate stocks, he added.
A simple and effective approach for the average investor, he says, would be to buy a target-date fund. These are well-diversified funds that automatically change their asset allocation based on the investor's age.
His firm's average portfolio of 60 to 40 stocks and bonds currently allocates about 11.5% of its total holdings to the S&P 500 index, Fitzgerald said.
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