Amid the wider performance of the US equity market, one particularly astonishing statistic is that the top 10 stocks in the S&P 500 Index now account for almost 30% of the entire index value. The picture is even more stark for the Russell 1000 Growth Index, with close to half of the entire index value concentrated in the 10 largest constituents.1
US equity market concentration has been gradually increasing since the global financial crisis, but in recent years, it has become more acute. Much of the rise in concentration can be attributed to just five stocks—Facebook, Amazon, Apple, Microsoft, Google/Alphabet—the so‑called FAAMGs, which have experienced dramatic increases in their market capitalization. The increasingly concentrated market raises concerns about the broader market being vulnerable to the performance of the dominant few. It also creates distinct challenges for identifying alpha opportunities across the broader large‑cap universe.
In thinking about the potential risks posed by heightened market concentration, there are two important questions to consider.
The first is: How much of the rise in index concentration is due to the natural topline growth of companies versus that which is due to companies being reweighted higher in the index? Within the Russell 1000 Growth Index, for example, certain companies have been significantly reweighted higher in recent years, simply by virtue of their higher stock price. Apple is perhaps the prime example of this kind of concentration effect. In contrast, Amazon is a stock that has seen only relatively modest increases as a result of index reweighting and has instead been driven by underlying growth in revenue and earnings.
1 Source: T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved. S&P 500 Index top 10 holdings represent 29.2% of total value. Russell 1000 Growth Index top 10 holdings represent 46.6% of total value. As of August 31, 2020.
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