Several Stocks Are Driving Most of the Market Gains. Here Are Some Reasons Why Investors Shouldn't Worry Too Much.

A select group of Big Tech stocks are once again leading the stock market surge, which isn’t necessarily a negative development. Historically, periods of increasing market concentration have coincided with stronger performance for the S&P 500, according to a recent report by Michael Mauboussin and Dan Callahan from Counterpoint Global.

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Critics often point to the high valuation premiums of the Magnificent Seven stocks and the top ten most valuable U.S. companies. However, these companies are also generating a significant portion of all corporate profits, indicating that their economic fundamentals justify these premiums. Future earnings growth projections for these companies remain uncertain, but their current performance supports their valuations.

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Mauboussin and Callahan's analysis shows that the aggregate economic profit for U.S. public companies in their study — covering those listed on the New York Stock Exchange, Nasdaq, and American Stock Exchange — was $481 billion in 2023. The top ten companies by market capitalization contributed $331 billion of this total. Despite representing 27% of the total market capitalization, these ten companies accounted for nearly 70% of the profits.

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Furthermore, the U.S. market, while more concentrated now than it has been since the 1960s, is still less so compared to other developed markets like Switzerland, France, Australia, Germany, and Canada, which have higher rates of concentration among their largest stocks.

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Since the beginning of 2024, hopes among bullish investors for a shift away from Big Tech dominance have largely not materialized. However, Mauboussin and Callahan’s research suggests that such a rotation may not be necessary for stocks to reach new highs.

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Data from DataTrek indicates that the Magnificent Seven — Apple Inc., Microsoft Corp., Nvidia Corp., Alphabet Inc., Meta Platforms Inc., Amazon.com Inc., and Tesla Inc. — have driven approximately 76% of the S&P 500’s gains year-to-date as of the end of May. These same stocks were responsible for more than half of the index’s returns in 2023.

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Market concentration began increasing rapidly in early 2023, and since then, the S&P 500 has achieved above-average returns, rising over 24% in 2023, excluding dividends. The index has gained more than 11% since the start of 2024, according to FactSet data. For comparison, the S&P 500 has delivered an annualized price return of 7.3% since its inception on March 4, 1957, based on Dow Jones Market Data.

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This ongoing concentration in the market, driven by the exceptional performance of top tech stocks, has proven beneficial for overall market gains. While there is debate about the sustainability of this trend and the potential risks of over-reliance on a few key players, historical data and current profit contributions suggest that the prominence of Big Tech in the stock market is underpinned by solid economic fundamentals. Investors continue to see value in these companies, which dominate both market capitalization and profit generation. As long as these companies maintain their competitive edge and innovation, they are likely to remain central to the market’s trajectory.

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Overall, the dominance of Big Tech stocks reflects a broader trend of market concentration that has historically been associated with stronger performance for the S&P 500. Despite concerns about valuations and future growth, the substantial profits generated by these leading companies justify their current market premiums and support continued market gains.

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