S&P 500 Concentration Increases Potential For Lower Long-Term Returns

The current concentration of market leadership surpasses any historic precedent, even the tech-inspired bubble top of 2000, as the chart below illustrates.

This chart also teaches an important lesson, that concentrated markets tend to reflect market extremes that are prone to correction. The 2000 top is conspicuous, but the chart also depicts pullbacks after more mild spikes in concentration.

Our historical work confirms extremes of concentration creates vulnerable markets. At various times in the 19th- century canal and railroad stocks dominated markets, which were then followed by sharp declines. The Nifty Fifty market of the early 1970s is a well known 20th-century example. There are certainly more. None of the previous cases we identified reached current levels of concentration.

The rapid growth of technology and passive investing strategies are powerful drivers of the current concentration, but history suggests that such extremes will not last indefinitely.

For free sample issues of the Global Investment Letter please visit: https://www.globalinvestmentletter.com/sample-issue/