Much ink has been spilled on the top-heavy nature of the 203 US stock market, with the rally led by a few large-cap stocks. But is it possible that top-heavy markets are perfectly normal?
Financial Times columnist Robert Armstrong recently posed that question, in response to an earlier FT piece noting that while the MSCI world index advanced this year, the index would be down if not for the outsized gains of the magnificent seven – Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta.
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Armstrong suggests this may be less surprising than it seems, citing Hendrik Bessembinder’s famous research showing index returns are largely driven by a small number of stocks. Additionally, the five biggest companies currently account for about 15 per cent of total market capitalisation – roughly the same as it was in 1974, says Armstrong.
Market returns, he adds, “are by nature very, very concentrated”.
True – but they’ve been freakishly concentrated this year. The 10 largest stocks account for 134 per cent of the S&P 500′s returns this year, said Strategas Research’s Todd Sohn. Since 1991, the median number has been 24 per cent.
No other year resembles 2023 – not even in 2007, when the top 10 accounted for 79 per cent of index returns. Yes, it’s normal for market returns to be concentrated, but 2023 is different – we have never seen such a top-heavy rally.
