(BFM Bourse) – According to a recent analysis by Goldman Sachs, the ten largest stocks in the S&P 500 accounted for 33% of the total capitalization of the index. But the American bank qualifies the risks associated with this concentration.
This is not a new phenomenon, but it has increased in recent months. The American market largely depends on a handful of stocks, notably the “Magnificent Seven”.
As a reminder, this term refers to seven groups, namely Alphabet, Tesla, Apple, Microsoft, Meta, Amazon and Nvidia, “big techs” which alone or almost alone carried the rise in the S&P 500 last year.
“The excitement around the Magnificent Seven is justified by the rapid adoption of artificial intelligence, improving productivity in most sectors of the American economy. This has naturally supported technology stocks, including semiconductor manufacturer Nvidia, the modern equivalent of a shovel salesman from the gold rush era,” explained Ostrum Asset Management in February.
>> Access our exclusive graphic analyses, and gain insight into the Trading Portfolio
Previous periods of historical concentration
Even if Apple (-14%*) and Tesla (-40%) have suffered since the start of the year, the good performances of the other groups in this club mean that the phenomenon of concentration in the S&P 500 has hardly diminished.
According to a recent study by Goldman Sachs, published at the end of March, the 10 largest stocks in the S&P 500 accounted for a third (33%) of the market capitalization of the entire American index, a percentage higher than that of the bubble internet of the 2000s (27% at peak). Another figure: the ten largest capitalizations of the S&P 500 represented a third of the value creation generated by the American index (16% per year on average over the last five years).
However, should this concentration worry investors? “The excess valuation of the Magnificent Seven could be a source of financial instability,” Ostrum Asset Management judged in February.
Goldman Sachs, for its part, puts this risk into perspective and is even rather reassuring. By combining the data of its analysts with a study by professors at the University of Chicago, Eugene Fama and Kenneth French, the bank notes that seven historical episodes of hyper concentration on ten stocks since the 1920s have marked the history of the S&P 500.
Not so expensive locomotives on the stock market
On this basis, its analysts observed that a high concentration of indices is not synonymous with an upcoming bearish signal on the markets. “The S&P 500 rose more often than it fell in the twelve months following past episodes of peak concentration,” the bank wrote.
“In most of these periods, stocks continued to rally after reaching a peak of concentration. The most recent episodes, in 2009 and 2020, coincided with a marked improvement in the macroeconomic outlook. In 1932, the peak of concentration marked the trough of a major economic recession, and the S&P 500 rose sharply in the months that followed,” she explains.
It should be noted, however, that in 1973 and 2000 the peak of concentration was followed by the end of a bull market, with a recession the following year. But in 1964, conversely, the S&P 500 continued to rise and the American economy performed well over a prolonged period even as the concentration of the index on a few stocks faded.
Furthermore, Goldman Sachs also qualifies the “overvaluation” of the ten largest stocks in the S&P 500. On the basis of expected profits, the valuation of these ten stocks reflects a premium of 35% at the end of March compared to some 490 other stocks, compared to 80% in mid-2023 and especially 100% during the 2000s.
“While it is true that the degree of concentration of market capitalization is higher today than the peak reached in 2000, the largest stocks display much lower multiples than during the technology bubble,” explains Goldman Sachs.
Less concentrated European markets
Let us be careful to remember that past performance is no indication of future performance. But the Goldman Sachs study has the merit of recontextualizing the phenomena of hyperconcentration.
In BFM Bourse last week, Pierre Barral of Natixis IM also put into perspective the exceptional nature and the dangers linked to this very pronounced concentration of the American market.
“It makes a lot of noise” but “this phenomenon is not exceptional”, he judged. “According to an American study, over the thirty years from 1990 to 2020, of the 64,000 values analyzed, five created 10% of the value,” he explained. “The real question is not whether it is dangerous to be invested in six or seven stocks via the S&P 500 (for example via index funds, ETFs, Editor’s note) but whether these few stocks are not on -represented for the wrong reasons,” he continued.
The market expert considered that this concentration was justified. “Companies are not valued at crazy levels,” he considered, citing the example of Nvidia which is evolving, according to him, on a valuation multiple lower than that of 2021. “The prices are extraordinary but that’s because that business models also deliver exceptional results,” he concluded.
Let us emphasize that in Europe, although the phenomenon of concentration may exist, it is much less than in the United States. UBS recently noted that if the “Magnificent Seven” account for 25% of the market capitalization of the S&P 500, to achieve such a percentage on the Stoxx Europe 600 it was necessary to count no less than….18 stocks. And in diversified sectors (pharmaceuticals, luxury, tech, industrial, agri-food, semiconductors, banks, oil, etc.) while the S&P 500 remains focused on tech.
*Classes were stopped after the European close on Friday evening.
Julien Marion – ©2024 BFM Bourse