Discussions centred on the American stock market’s perceived proclivity towards enormous tech companies continue to engage the attention of analysts. The reason for this is clear as daylight: the total value of the top three stocks globally – Apple, Microsoft, and Nvidia – currently hover around $10 trillion, collectively accounting for over 10% of the world’s stock market capitalisation.
But is this cause for alarm?
In a recent report, “Stock Market Concentration: How Much Is Too Much?” authored by Michael Mauboussin from Morgan Stanley, the answer might not be what you expected. This in-depth report highlights a number of notable factors.
Firstly, despite a decade of swift concentration growth, the US maintains its standing as one of the world’s most diverse markets.
Secondly, calculating the “ideal level of concentration” is complicated. A decade ago, large-cap stocks may have been significantly undervalued, allowing them to yield the impressive returns witnessed over the past decade.
Thirdly, the performance of stock markets tends to improve during times of increasing concentration.
Fourthly, the valuations of today’s top stocks are far less inflated compared to the end of the 1990s.
The present surge is based on sound fundamentals, with the highest ranking ten companies contributing to 69% of the overall economic profit. Indeed, the leading stocks continue to grow, but for admirable reasons.