Talk of the US stock market being too concentrated in a handful of mega-cap tech companies continues to occupy analysts’ minds.
It’s easy to understand why. The combined value of the three biggest stocks in the world – Apple, Microsoft, Nvidia – is now almost $10 trillion. They account for more than 10 per cent of global stock market capitalisation.
Is this bad?
Not necessarily, according to Stock Market Concentration: How Much Is Too Much?, a new report by Morgan Stanley’s Michael Mauboussin. It’s a detailed report, but a few points stand out.
Firstly, even after a decade of rapidly increasing concentration, the US remains one of the most diversified markets in the world.
Secondly, it’s difficult to determine the “correct level of concentration”. Large-cap stocks may have been too cheap a decade ago, allowing them to deliver the huge returns seen over the past 10 years.
Thirdly, stock markets tend to do better during periods of increasing concentration.
Fourthly, today’s top stocks have much more modest valuations relative to the late 1990s.
Indeed, today’s boom is backed by solid fundamentals, with the top 10 companies accounting for 69 per cent of total economic profit. Yes, the big stocks keep getting bigger, but they’re getting bigger for good reasons.
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