The Messy Aftermath of Concentrated Markets

Our View

The US stock market has reached its highest concentration level in more than 50 years, with the top 10 stocks comprising a weighting of 33%.¹ While there’s always an urge to proclaim “this time is different,” market history tells us that while the story may change, the plot often ends the same. We’ll examine how the top 10 stocks have historically performed after they’ve attained their current levels of concentration and valuations, and why the aftermath of this story could be quite messy.

There’s always an urge to proclaim “this time is different.”

Observations

1. The weight of the top 10 stocks has been increasing at a much higher rate than their earnings; this has created a gap between their earnings and weights (FIGURE 1).

The last time a gap of this magnitude appeared was at the height of the dot-com bubble and, before that, the Nifty Fifty bubble of the late 1960s.

A stock’s placement in the top 10 tends to be short-lived and can be volatile (FIGURE 2).

2. The price-to-earnings ratio (P/E ratio)² of the top 10 stocks compared to the bottom 490 stocks is at an extreme not seen since the peak of the dot-com bubble (excluding the COVID-19 period, which affected earnings figures) (FIGURE 3).

Historically, when the P/E ratio of the bottom 490 has been this inexpensive relative to the P/E ratio of the top 10, the bottom 490 have outperformed by 4.5% on average over the next 5 years (FIGURE 4).

3. Even after taking into account the recent outperformance of the top 10, the bottom 490 have outperformed the top 10 in 70% of 5-year rolling time periods since 1970 (FIGURE 5).

4. When concentration in the top 10 is 30% or more, the bottom 490 have historically outperformed 95% of the time over the next five years (FIGURE 6).

5. A rise in concentration levels and valuation levels often precedes a period of heightened volatility and larger drawdowns for the largest stocks (FIGURE 7).

FIGURE 1

The Gap Between the Earnings and Weights of the Top 10 Stocks Has Widened Significantly
Largest US Stocks Earnings vs. Weight (1970-2024)

As of 2/29/24. Represents the top 10 stocks from a market cap-weighted portfolio of the largest 500 US stocks. Capitalization weighting is a method for constructing an portfolio according to the relative total market value of the stocks it’s covering. The components with higher market caps carry greater weight, while those with smaller market caps have a lower weight. Data Sources: Hartford Equity Modeling Platform and Compustat.

FIGURE 2

The 10 Largest Stocks Change Frequently From Decade to Decade
10 Largest US Companies (Select Years From 1969-2023)

1969	1979	1989	1999	2009	2019	2023
International Business Machines Corp	International Business Machines Corp	Exxon	Microsoft Corp	Exxon Mobil Corp	Apple Inc	Apple Inc
AT&T Corp	AT&T Corp	General Electric Co	General Electric Co	Microsoft Corp	Microsoft Corp	Microsoft Corp
Exxon	Exxon	International Business Machines Corp	Cisco Systems Inc	Apple Inc	Alphabet Inc	Alphabet Inc
Texaco Inc	Schlumberger Ltd	AT&T Corp	Walmart Inc	Johnson & Johnson	Amazon.com Inc	Amazon.com Inc
Xerox Holdings Corp	Amoco Corp	Altria Group Inc	Exxon Mobil Corp	Procter & Gamble Co	Meta Platforms Inc	NVIDIA Corporation
General Electric Co	Mobil Corp	Merck & Co Inc	Intel Corp	International Business Machines Corp	JPMorgan Chase & Co	Meta Platforms Inc
3M Co	General Electric Co	Bristol-Myers Squibb Co	Lucent Technologies Inc	JPMorgan Chase & Co	Johnson & Johnson	Tesla Inc
E. I. du Pont de Nemours and Co	Standard Oil Co	E. I. du Pont de Nemours and Co	International Business Machines Corp	AT&T Inc	Visa Inc	Broadcom Inc
Coca-Cola Co	Chevron Corp	Amoco Corp	Citigroup Inc	General Electric Co	Procter & Gamble Co	JPMorgan Chase & Co
Mobil Corp	Atlantic Richfield Co	BellSouth Corp	Time Warner Inc	Chevron Corp	Bank of America Corp	UnitedHealth Group Incorporated

Represents the top 10 stocks from a market cap-weighted portfolio of the 500 largest US stocks. Data Sources: Hartford Equity Modeling Platform and Compustat.

FIGURE 3

The P/E Ratio of the Top 10 Stocks Is Significantly Higher Than the Bottom 490
P/E Ratio Comparison (1990-2024)

As of 2/29/24. Based on the 500 largest US stocks by market cap. Top 10 and bottom 490 portfolios are market cap-weighted and rebalanced monthly. Data Sources: Hartford Equity Modeling Platform and FactSet.

FIGURE 4

The Bottom 490 Stocks Have Outperformed the Top 10 by an Average of 4.5% When Their Valuations Gap Was at Its Widest
Five-Year Excess Returns: Bottom 490 Stocks Minus the Top 10 Stocks

Performance following periods of top-decile valuations based on observations from 12/31/89–2/29/19. Top 10 and bottom 490 portfolios are market cap-weighted and rebalanced monthly. Past performance does not guarantee future results. Excess returns are investment returns from a security or portfolio that exceed a benchmark or index with a similar level of risk. Data Sources: Hartford Equity Modeling Platform and Compustat.

FIGURE 5

The Bottom 490 Stocks Have Outperformed the Top 10 in 70% of Rolling 5-Year Periods
Five-Year Excess Returns: Bottom 490 Stocks Minus the Top 10 Stocks

Chart data: 12/31/69-2/29/24. Past performance does not guarantee future results. Based on the 500 largest US stocks by market cap. Top 10 and bottom 490 portfolios are market cap-weighted and rebalanced monthly. When the line is above 0, the bottom 490 stocks outperformed the top 10 stocks. Data Sources: Hartford Equity Modeling Platform and Compustat.

FIGURE 6

When Top 10 Concentration Is 30% or More, the Bottom 490 Have Outperformed 95% of the Time Over the Next Five Years
Bottom 490 Stocks Five-Year Outperformance at Different Concentration Levels (1970-2024)

As of 2/29/24. Past performance does not guarantee future results. Based on the 500 largest US stocks. Top 10 and bottom 490 portfolios are market cap-weighted and rebalanced monthly. Data Sources: Hartford Equity Modeling Platform and Compustat.

FIGURE 7

Most Drawdowns for the Top 10 Stocks Have Been Larger Than for the Bottom 490
Top 10 vs. Bottom 490 Drawdowns

Chart data: 1/31/70-2/29/24. Past performance does not guarantee future results. Based on the 500 largest US stocks. Top 10 and bottom 490 portfolios are market cap-weighted and rebalanced monthly. Data Sources: Hartford Equity Modeling Platform and Compustat.

To learn more about managing concentration risk, please talk to your financial professional.

¹ As of 2/29/24. Represents the top 10 stocks from a market cap-weighted portfolio of the largest 500 US stocks. Data Sources: Hartford Equity Modeling Platform and Compustat.

² The price-to-earnings ratio measures a company’s share price relative to its earnings-per-share and helps assess the relative value of a company’s stock.

Important Risks: Investing involves risk, including the possible loss of principal.

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The views expressed here are those of the authors and should not be construed as investment advice. They are based on available information and are subject to change without notice. Portfolio positioning is at the discretion of the individual portfolio management teams; individual portfolio management teams, and different fund sub-advisers, may hold different views and may make different investment decisions for different clients or portfolios. This material and/or its contents are current as of the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Hartford Funds.

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