The stock market's concentration, in one chart
Add Axios as your preferred source to
see more of our stories on Google.
The stock market has never been as concentrated as it is now — even after the recent decline in Nvidia stock.
Why it matters: A large amount of the value of the stock market is concentrated in a handful of companies — which is to say, the performance of the stock market as a whole is increasingly a function of how just a few megacap tech stocks are faring.
How it works: One generally accepted way of measuring concentration is to look at the Herfindahl-Hirschman Index, or HHI, more familiar from its use in antitrust enforcement.
- HHI takes a sum-of-the-squares approach: It squares the market share of each S&P 500 component, and then adds all those numbers together.
- If every S&P 500 component was exactly 1/500 (0.2%) of the index, then the sum of the squares — the HHI — would come to 20, the lowest possible score.
- Conversely, if 5 stocks each comprised 10% of the index, accounting for half the total capitalization, while the other 495 were 0.1% each, then the HHI would be 505.
By the numbers: The old high point, set in March 2000 at the height of the Wintel duopoly, was 123. That record was shattered in June 2020, as a handful of high-fliers started to dominate the stock market.
- By August 2020 the S&P 500's HHI reached what was then an all-time high of 159. More recently, with the AI boom, it's risen even higher. By the end of May 2024, it reached 184.
Of note: The most recent spike, in May, is in part an Nvidia story — because the AI chipmaker's valuation rose so fast.
- Still, at the end of May, Nvidia's market capitalization was $2.7 trillion, well below the $3.1 trillion at which it closed on Wednesday. As a result, even after the recent sharp decline in Nvidia shares, the S&P 500 HHI could still set yet another new high this month.
The bottom line: What's far from clear is whether this spike in concentration is bullish or bearish. Concentration will probably retreat from its current highs at some point — but while bears fear devastation in megacaps, bulls look forward to seeing more strength in the rest of the market.
