BofA Securities’ Australia-based quantitative strategist Nigel Tupper published a deep look into the history of market concentration and uncovered some remarkable facts. Most importantly, equity market dependence on a few megacap stocks is nothing new, and only 54 stocks out of approximately 3,000 accounted for half of all global equity market gains over the past 20 years
Investors concerned about market concentration in the S&P 500 will not be thrilled to hear about global market attribution. Mr. Tupper found that over the past three years only four stocks - NVIDIA Corp., Microsoft Corp., Apple Inc. and Eli Lilly and Co. - contributed 50 per cent of returns for the MSCI All Country World Index.
Year to date, Nvidia, Microsoft, Amazon.com, Meta Platforms Inc., Eli Lilly and Taiwan Semiconductor Manufacturing Company (TSMC) have combined to account for 51.3 per cent of the returns for the global equity benchmark. Asian markets specifically have been even more concentrated as TSMC, Tencent Holdings Ltd., Hon Hai Precision Ltd. and SK Hynix have combined to determine 75 per cent of returns for the MSCI Asia ex-Japan benchmark.
Mr. Tupper noted that in current narrow market conditions, “a view on the [dominant] stocks arguably becomes more important than country, sector, or style allocation.” Active managers have even more trouble than usual keeping up with their benchmarks because to do so means fund portfolios must become just as concentrated, which takes away from risk management.
The strategist noted that dominant stocks have changed over time. General Electric Co. and Exxon Mobil Corp. were top three contributors for the 2004-2016 index return period but have far less influence now. Apple, Microsoft and Amazon.com, however, remain dominant forces after 20 years.
Bob Farrell, famed strategist for BofA Securities precursor Merrill Lynch, made “Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names” one of his ten most important rules about investing. Clearly there is more risk when returns become dependent on a few stocks, as investors learned in early 2000.
BofA Securities expects market leadership to broaden in the U.S. It predicts that the average earnings growth for the Magnificent Seven stocks in 2024 to be the same as the other 493 companies in the benchmark. This, however, becomes more in question as economic data continues to disappoint.
No one has been consistently able to pick market tops so I’m not about to try that here. Investors should be cheering any signs of broadening leadership in equity markets as, whether visible or not, conditions will remain precarious otherwise.
-- Scott Barlow, Globe and Mail market strategist
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Compiled by Globe Investor Staff