By Alexandra Morris Investment Director
As a dwindling number of stocks drive global equity returns, what are the implications for markets and investors?
For several months I have explored the growing dominance of a handful of US technology companies and the distortion this has created for global stock markets. Since the start of 2023, the Magnificent Seven stocks[1] have contributed more than three quarters of the S&P 500‘s 44% return and just three (Nvidia, Meta and Alphabet) have provided well over half of these gains (figure 1). This strong performance has seen the septet grow to nearly a third of the overall US market size and almost a fifth of the global stock market[2] – well above the peak of the dot com bubble when the largest seven tech stocks made up around of a fifth of the S&P 500 index weight.
Driven by global reach and strong fundamentals – the current market champions are far more profitable and better capitalised than those that led in 2000 – they have also gained increasing momentum from the rise of passive investing (figure 2). Assets in global index-based funds overtook those invested in active strategies last year according to Morningstar, while the passive proportion in the US has now risen to around 60%.
The result is a market that has become increasingly narrow, creating headwinds for active managers and rising concentration risks for passive investors.
