Superstar companies dominate the stock market. For investors, that might be fine
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The stock market is increasingly dominated by a few huge and extremely profitable "superstar" companies.
Why it matters: The historic rise in stock market concentration reflects Big Tech's dominance and mirrors a worrying rise in wealth inequality among regular people — but it's not clear if it's a real problem for investors.
By the numbers: The most profitable third of publicly listed U.S. stocks now account for roughly two-thirds of total market capitalization — the highest share on record, going back to 1963.
- That's 63 years! The data was highlighted by Ernie Tedeschi, chief economist at Stripe, who wrote about it last week.
How it works: The AI boom made the biggest companies even more profitable last year, he says.
- And some largeish businesses that grew more profitable ascended into the top third.
- The big guys aren't simply the Magnificent 7 companies, but include Netflix, Home Depot and JPMorgan Chase.
"We're just seeing explosive growth in established companies," Tedeschi tells Axios.
The big picture: The U.S. stock market is incredibly top heavy. Just a few firms make up nearly 40% of the total market cap of the S&P 500.
- The current level of concentration in the market is now higher than it was in 1932, per data cited recently by Morningstar.
- Back then, nearly 13% of the entire value of the U.S. stock market was concentrated in one company, AT&T, as Wall Street Journal columnist Jason Zweig noted earlier this year.
- Another time of high concentration was during the dot-com boom.
- The current concentration could intensify if mega AI startups Anthropic and OpenAI go public this year — not to mention SpaceX.
Follow the money: High concentration means investor returns are increasingly dependent on just a few companies.
- It's kind of counterintuitive: You would think that by investing in, say, an index fund that tracks the S&P 500, you're diversifying your investments. Instead, you're actually just betting on a handful of companies.
"If the biggest trees fall, everyone will feel the forest shake" is how the New York Times' Jeff Sommer put it recently.
- For those who've been told diversification matters, it's uncomfortable.
- Investors are talking about this "a lot," Dan Lefkovitz, a strategist with Morningstar, tells Axios.
The intrigue: The risks of concentration are a great talking point for those who think they can do a better job actively managing your money, WSJ's Zweig points out.
- But concentration is not necessarily a bad development for investors. Investing in the stock market in 1932, when concentration was super high, was a great deal. Stocks were cheap.
"The U.S. stock market has not become riskier as it has become more concentrated," write Mark Kritzman, chief executive of Windham Capital Management, and David Turkington, head of State Street Associates, whose research appeared last year.
- They put historical data through a few tests to see if investors benefited by avoiding putting money into concentrated markets. They didn't.
- They find that big companies are inherently less risky than small ones — they're more diversified (that word again) — offering more products and serving bigger markets, with more flexibility to manage troubled times and better access to capital.
Yes, but: There are, of course, all kinds of other risks to having just a few big companies suck up all the profits — there is a thing called antitrust law for one.
The bottom line: A few big companies running the whole economy is scary for regular people, but for investors, maybe not.
