The Market Is Always Top Heavy

The more things change the more they stay the same.

Every few years, different investing arguments have a way of recycling themselves. Notable examples:

• Active vs. Passive:

•  Is the 60/40 portfolio dead?

•  Are non-U.S. stocks worth the hassle?

Recently, there’s been increased emphasis on the concentration that exists at the top of the U.S. stock market.

In the first quarter of the year, 10 stocks created more than 70% of the total return in U.S. large caps. And those 10 companies make up approximately 25% of the index.

To many, this is problematic. It’s often said markets are weakest when they are most narrow. With so few stocks delivering most of the gains, the U.S. market is extremely narrow.

But this has been true throughout history—it’s normal for the market to be dominated by a few companies. As can be seen below, the combined index weight of the top single stock, top five stocks, and top ten stocks have hovered in the range they are now for much of history.

One argument is that concentration at the top of the market represents a “bubble” of sorts—or something that is not supported by business fundamentals.

There are two important caveats to this argument—one that addresses the present and one historically.

1) The Present: The five largest companies in the U.S. are Apple, Microsoft, Google, NVIDIA, and Amazon. All of these companies are very profitable. It could be argued they are overvalued—that’s always a debate regardless of company size—but it’s not an early 2000’s period of euphoria that put these companies at the top of the market. 

2) Historically: A breakdown of the largest U.S. stocks by decade shown below shows some companies have stayed on top for long periods. AT&T was among the largest for six straight decades beginning in 1930. General Motors and General Electric ranked in the top 10 at the start of multiple decades. IBM and Exxon Mobil were consistently present at the top in the ‘70s and ‘80s.

Largest 10 U.S. Stocks at Start of Each Decade

The Wall Street Journal’s Jason Zweig authored an article on this topic a few years ago. He found that there was actually a surprising lack of turnover at the top of the market. In his words:

“From the beginning of 1926 through the end of [2019], only 10 companies have ever ranked No.1 among all U.S. stocks by market capitalization.”

Using data from the Center for Research in Security Prices (CRSP), AT&T represented 13% of all U.S. stock market value in 1932. IBM made up nearly 7% in 1970. Today, Apple makes up roughly 6% of all U.S. stock market value—certainly a large amount but not an anomaly from history.

In short, stock market concentration in a few companies is not a new normal; it is something that has been observed quite often.

And data would strongly indicate it’s nearly impossible to predict which large companies will outperform the stock market and which will underperform over long periods. This highlights the importance of having a broadly diversified portfolio with exposure to a wide number of companies, industries, and geographies.

The good news is it’s never been easier to diversify beyond U.S. large caps if you’re worried about Apple and Microsoft making up such a large portion of the index.