Concentration Risk in US Equities

The US stock market has rarely looked as narrow as it does today. While the S&P 500 is often thought of as a diversified benchmark, in practice a small number of very large companies now account for a disproportionate share of both its market value and its performance.

A NARROW MARKET

The ten largest US companies today account for almost 40% of the S&P 500’s value, up from just 20% at the peak of the dot-com boom in 2000. Seven of these names are technology or AI-linked businesses, a degree of sector concentration that is without precedent.

The performance gap between large and small companies is also striking. The equal-weight version of the S&P 500, which gives each constituent the same importance, has lagged the cap-weighted index to its weakest level in more than two decades. Put simply, the average stock has gone nowhere, while a small group of companies has carried the market higher.

In terms of earnings, the picture is equally lopsided. Over the past year, the ten largest companies accounted for 31% of the growth in revenues and 55% of the growth in net income across the entire S&P 500. In capital expenditure, their share was even larger, at close to 70%. These businesses are not only delivering the bulk of profit growth, they are also reinvesting heavily to sustain it.

WHY THIS TIME LOOKS DIFFERENT

Market concentration is not inherently a problem. In fact, the dominance of the largest companies is often a reflection of their underlying strength. The leading US technology firms are not speculative start-ups; they are among the most profitable enterprises in history.

Valuations, while elevated, are not at the extremes seen during the dot-com bubble. For example, today’s leaders trade at forward earnings multiples between 20 and 40 times, compared with 85-90 times for companies such as Cisco and Oracle in 2000. Their profitability is real, and their scale is formidable. Microsoft has been a top-10 company for three decades, a reminder that durable franchises can remain leaders for extended periods.

REASONS FOR CAUTION

That said, concentration does carry risks.

• Diversification: Index investors who expect broad exposure are increasingly reliant on the fortunes of a handful of names. The number of stocks required to replicate the diversification of the S&P 500 has fallen to fewer than 50 – compared to over 100 for the MSCI World.
• Leadership cycles: History shows that dominant companies do not always stay dominant. Nortel and Intel were once market leaders; today their positions are much diminished. Even the strongest companies are not immune to competitive pressures or technological shifts.
• Valuations: While not at bubble levels, valuations remain high. In the event of a slowdown, a repricing of these stocks is plausible. It would not be surprising to see leading companies trade at 20–25x earnings rather than current multiples, which could result in a meaningful market correction.
• Capital intensity: The leading technology companies are now investing vast sums in AI and related infrastructure. In the past year, Microsoft, Amazon, Alphabet and Meta alone spent close to $300bn on capital expenditure. If returns on these investments fall short, profitability could be pressured.

OUR VIEW

At Hundle, we recognise the strength and resilience of the largest US companies. Their earnings power, investment in future technologies, and proven franchises justify a degree of their market dominance. However, we are also mindful that market concentration and elevated valuations create vulnerabilities.

We therefore prefer to seek equity exposure in parts of the market that offer stronger valuation support and greater diversification benefits. Attractive opportunities remain in sectors and regions outside the narrow group of market leaders. These areas may not attract the same attention, but they provide investors with the potential for long-term compounding of wealth with less concentration risk.

Crucially, we also look beyond equities altogether. Recent years have underscored the limitations of traditional diversification: equities and traditional bonds often move in tandem, leaving investors with fewer places to hide. Our philosophy remains unchanged: true diversification comes not from owning more of the same, but from owning structurally uncorrelated assets.

In addition to gold, which has a proven role as a diversifier, we continue to favour asset-backed lending strategies in private credit. These are loans secured against real, tangible collateral that can deliver equity-like returns with significantly lower volatility. Such strategies have shown resilience precisely when resilience matters most, and they allow us to balance portfolios with assets that behave differently from mainstream equities and bonds.

CONCLUSION

The concentration of returns and valuations in US equities is both a reflection of the extraordinary strength of a few companies and a source of risk for investors. While today’s leaders are more profitable than the dot-com era champions, the risks of over-reliance, valuation compression, and capital intensity remain.

In our view, portfolios are better served by balancing exposure to the market leaders with positions in attractively valued businesses across a broader set of sectors and geographies, and by adding diversifying assets such as gold, private credit, and appropriate hedge funds. This approach preserves diversification and improves the prospects for sustainable long-term returns.

Sources: S&P Capital IQ; Financial Times; Bloomberg