Two seemingly contradictory statements can both be true:

• The US was one of the worst-performing stock markets
• The best-performing stocks in the world were mostly US companies

On the first, after years of being top dog, the US equity market (as represented by the MSCI USA Index¹) lost 19% for investors last year. The loss put the US in 17^th position out of the 23 countries in the MSCI World Index² of developed-market stocks.

But this was driven by a handful of tech behemoths, which dragged the market down. A portfolio of the seven-largest US companies from a year ago would have lost investors 40% in 2022 (FIGURE 1). A portfolio of the rest would have lost only 14%.

A small number of companies have been in the driver's seat in terms of market performance. That risk came home to roost last year.

The US market has become increasingly concentrated in recent years, a risk we've been highlighting for some time. A small number of companies have been in the driver's seat in terms of market performance. That risk came home to roost last year.

It's within those remaining companies that many of the best-performing stocks globally could be found in 2022. Eight of the top-10 performers were US companies. Sixteen of the top 25 also were US-based, as were 53 of the top 100. US companies made up about 41% of the MSCI World Index at the start of the year, so they've punched above their weight in delivering good performance.

Most of these very good performers are in the energy sector, including all eight in the top 10. With a 119% return, Occidental Petroleum is top of the pile, followed by Hess, Exxon Mobil, Marathon Petroleum, and Schlumberger (the oilfield services company). Further down the top 25 are steel producer Steel Dynamics and three US healthcare companies.

The strong performance of energy companies shouldn't be a surprise given the rise in oil prices in response to the war in Ukraine. If we were to repeat this same analysis in a year’s time, the top performers could almost certainly be different.

But what may continue to be the case is that high levels of concentration in the US stock market (as well as in other ex-US markets) means only a handful of stocks will exert an outsized influence on the returns investors earn.

In previous years, this was a benefit to US stock-market investors. Over the 2020-2021 period, US equity returns would have been around 20% lower without these seven companies (34% vs. 54%). But last year it was to their detriment.

It's very important for investors to understand the concentrated exposures they're taking on, often unwittingly, when allocating to broad market indices. This could be in terms of stock, sector, style, or region. Achieving balance and diversification is, sadly, not as simple as investing in a portfolio of global stocks.

¹ MSCI USA Index is a free float-adjusted market capitalization-weighted index that is designed to measure the performance of the large- and mid-cap segments of the US market.

² MSCI World Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets.

Important Risks: Investing involves risk, including the possible loss of principal. • Investments in the commodities market and the natural-resource industry may increase liquidity risk, volatility, and risk of loss if adverse developments occur. • There are risks of focusing investments in securities of companies in the utilities and industrials sectors which may cause the performance to be sensitive to developments in those sectors. • Risks of focusing investments on the healthcare-related sector include regulatory and legal developments, patent considerations, intense competitive pressures, rapid technological changes, potential product obsolescence, and liquidity risk. • Diversification does not ensure a profit or protect against a loss in a declining market.

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