Is the market too concentrated?

Katie Martin (0:06)

Pushkin. When you talk about American exceptionalism in markets, do you know what you're really talking about? Tech, big tech, huge tech. Tech stocks are the US stock market, and the US stock market is tech. Now, that's great. Probably has been for years anyway. These tech monsters have made boatloads of money and become more and more important for how the overall market performs. But what if this is, first of all, really unhealthy and second of all, kind of running out of steam? The latest big AI release from OpenAI, the boffins behind ChatGPT, was a bit meh and suddenly people are getting some sneaking doubts. So today on the show, we're asking, is it time to concentrate on concentration?

This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist down in the basement of FT Towers, and I'm joined down the line by that scoundrel Rob Armstrong, who writes whole articles about why men should wear shorts at work, and then does not wear shorts at work himself.

Rob Armstrong (1:20)

Is it possible to have a successful podcast where the theme word, the word we keep coming back to, is meh? Is that really a successful media strategy, Katie? I don't think so. I think we need a spicier catchphrase than meh.

Katie Martin (1:35)

I'm not sure our marketing people would really go for meh. But whatever, meh it is. Now, I gather you are in a rustic cabin somewhere. What's going on with that?

Rob Armstrong (1:49)

Yes, I am in a cabin, which is in the backyard of my mother-in-law's house in scenic shelter island New York. I can just about see a swimming pool from where I sit here. So life is good.

Katie Martin (2:02)

Lovely. Good times. Good times. So, Rob, from your cabin in the woods, you wrote about this the other day in the Unhedged newsletter. It's all tech, techy, techy, tech, tech, tech. Shoot me some stats to tell the class. What are we dealing with here? How big is this techy, tech?

Rob Armstrong (2:21)

Well, let's talk about the top 10 stocks by market cap in America right now. They are in descending order of size, NVIDIA, Microsoft, Apple, Amazon, Alphabet, Meta, Broadcom, Tesla, Berkshire Hathaway, and JP Morgan Chase. And clever listeners will have noticed that that is eight tech companies and two finance companies.

Katie Martin (2:51)

Yes.

Rob Armstrong (2:51)

And that tells you how tech-oriented this market is. And those 10 stocks, here are some stats. They're 40% of the value of the S&P 500 That's market cap.

Katie Martin (3:04)

It was like 36 not so long ago, right? So it's even bigger.

Rob Armstrong (3:07)

So they're just, since April, they've just been hammering. They account for 56% of the gains in the index since the market bottomed on April 8th after Liberation Day. They account for about a third of the revenue growth in the last year in the index, about half or a bit more than half of the net income growth, and even more than half of the capital expenditure growth. So not only are they loads of the value, they're contributing loads of the growth in a lot of key categories. They are kind of keeping the index afloat growth wise.

Katie Martin (3:49)

Now, we've spoken about this before and you've written about this before, but it's really hard to figure out whether this is something we need to worry about or not. As long as these companies are in aggregate making boatloads of money, then who cares?

Rob Armstrong (4:02)

Yes, that is a good point. And something we know as a historical fact is that is always the case that in the stock market, a relatively small number of companies account for a massive amount of the gains. That is always historically true. It's just somewhat more true at certain times than others. The reason to worry, I guess, is there is an uncomfortable historical pattern.

So in 2000, we had a very concentrated stock market in the same way. A few companies accounted for a lot of the value. And you and I, or at least I, I will say politely and old enough to remember, that things turned out badly in 2000 And I was just looking today at the last huge spike in concentration before that, which was like around 1973, which I am not old enough to remember. And that big spike in concentration was also followed by a big decline in the stock market. So although you don't kind of know the direction of causality or what to make of it all, there is this unpleasant pattern that we have to reckon with. And maybe it's sort of that when stock markets get concentrated is when hype is kind of at its peak, right? That people are all jumping on the same narrative. Everybody is on the FOMO train, and bad things happen sooner or later.