Home| Features| About| Customer Support| Request Demo| Our Analysts| Login
Gallery inside!

The 20% S&P 500 is Now Dominated by Three Stocks, Which Account for 20% of Its Value. That Makes Some Investors Nervous.

June 7, 2024
minute read

For the first time since at least 2000, three U.S. stocks — Microsoft Corp., Nvidia Corp., and Apple Inc. — now represent over 20% of the S&P 500's total value, according to Dow Jones Market Data.

This concentration indicates that these three companies alone are worth more than hundreds of other S&P 500 constituents combined, as highlighted by Bespoke Investment Group. While historical data suggests that higher concentration often aligns with stronger S&P 500 returns, the rapid valuation increase of these major stocks is causing some investor unease, even among those previously optimistic.

“Strength in Nvidia and other megacaps has masked weakness in many other areas of the market,” said Katie Stockton, founder of Fairlead Strategies, in a report shared with MarketWatch. Stockton noted signs of decline in small caps, midcaps, the Dow Jones Industrial Average (DJIA), and the equal-weighted S&P 500.

Illustrative of this trend is the ratio of the Russell 2000, which focuses on small-cap stocks, to the S&P 500, hitting its lowest point since 2001, according to FactSet. The divergence between the equal-weighted and cap-weighted S&P 500 has also grown, with the equal-weight index underperforming significantly, touching its lowest level since 2009, per analysts at BofA Global Research.

The concentration is even more pronounced in the tech-heavy Nasdaq-100, where Microsoft, Nvidia, and Apple comprised 41% of its value as of Wednesday’s close, a level not seen since November 2023. This heavy reliance on a few stocks for the indexes' gains has become a frequent concern among bull-market skeptics, who fear a stall in these stocks could lead to a broader market decline.

Nvidia recently surpassed the $3 trillion market capitalization threshold, overtaking Apple as the second-largest U.S. stock, which has only heightened these concerns. In an X post that went viral, Richard Bernstein Advisors highlighted that only about 30% of S&P 500 stocks have outperformed the index in 2024, a rarity last seen during the dot-com bubble years of 1998 and 1999.

Despite the similarities in stock concentration, investors argue the current market environment differs from the dot-com era. The dominance of the largest stocks today largely reflects significant earnings and sales growth. However, the market is forward-looking, and skeptics question how long companies like Nvidia can sustain their rapid growth, given the cyclical nature of the semiconductor industry, noted Richard Bernstein in an interview with MarketWatch.

Bernstein doubts Nvidia can continue to exceed Wall Street’s expectations for much longer, which he believes overvalues the company's shares. Conversely, he argues that other large-cap index members haven't received adequate recognition. FactSet projects that the ten largest S&P 500 stocks will see a slowdown in earnings-per-share growth in the year's second half, while the rest of the index is expected to accelerate.

Bernstein pointed out that over 160 S&P 500 companies experienced a 25% or more increase in trailing 12-month net income in Q1 2024 — a strong performance, though not as high as Nvidia, but better than many other megacaps like Microsoft. He suggests this could lead to a scenario where the leading megacap stocks decline while the broader market rises, an early trend seen as Apple and Tesla shares struggled in 2024.

For months, Bernstein has been advising investors to seek opportunities in other segments of the global equities market, such as U.S. small caps and emerging-market stocks, which could benefit when the Federal Reserve begins cutting interest rates.

“It’s like a seesaw,” Bernstein said. “There are seven stocks on one side, and everything else in the global equity market is on the other side. Which side do you want to be on — not for the next 10 minutes, but for the next 10 quarters, or the next 10 years?” He advocated for positioning on the broader market side of the seesaw.

On Thursday, the S&P 500 and Nasdaq Composite closed with slight losses, as gains in consumer-discretionary, energy, and consumer-staples stocks offset losses from Nvidia and other semiconductor names. The DJIA ended higher, driven by a surge in Salesforce Inc. shares, which had dipped following their recent earnings report.

Bryan Curtis
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

Subscribe to our newsletter!

As a leading independent research provider, TradeAlgo keeps you connected from anywhere.

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

Related posts.