The S&P 500’s Concentration: A Cautionary Tale

Chad Holland |

Chances are you have read or heard about artificial intelligence or Chat GPT this year. In the stock market, there is a small group of stocks known as the “7 Tech Titans”, which includes leading technology firms exposed to the AI theme. The group of stocks has significantly outperformed this year due to growing excitement about AI, which has in turn increased its weight in the S&P 500. The five largest companies in the S&P 500, which are all part of the 7 Tech Titans, account for 22% of the entire index’s total market capitalization. These five companies include Apple, Microsoft, Amazon, NVIDIA, and Alphabet (the parent company of Google). 

The S&P 500 is now highly concentrated, surpassing the previous record set in December 1999. In that era, Microsoft, General Electric, Cisco, Walmart, and Intel collectively represented around 19% of the S&P 500. How have those five stocks fared since 2000? Figure 1 shows their combined weight in the S&P 500 has declined over time, while the weight of today’s five largest stocks has steadily increased. Figure 2 shows the five stocks have produced an average total return of 216% since 2000, compared to the S&P 500’s return of 349%. At an individual stock level, only one out of the five stocks managed to outperform the S&P 500 over the past two decades.

The two charts highlight the importance of diversification. In both instances, the high concentration resulted from the outperformance of a small group of stocks. However, the return data in Figure 2 shows that today’s winners are not necessarily tomorrow’s winners. Diversifying your stock holdings across different sectors and companies can help manage this risk. It’s also important to diversify across bonds and other asset classes, as well as regularly rebalance your portfolio to avoid concentration risk like the S&P 500. Financial markets are constantly changing, and our investment process is designed to preserve capital in times of volatility so you may take advantage of other investors missteps. Our goal is to provide superior after tax, risk adjusted, returns, within the confines of your willingness and ability to take risk.



Important Disclosures 

The views outlined in this e-mail are those of Holland Capital Management, LLC and should not be construed as individualized or personalized investment advice. Any economic and/or performance information cited is historical and not indicative of future results. 

Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. 

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of entire principal and potential illiquidity of the investment in a falling market.  Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price.  

Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Holland Capital Management, LLC or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed above to your individual situation, you are encouraged to consult with Holland Capital Management, LLC or the professional advisor of your choosing. All information, including that used to compile charts, is obtained from sources believed to be reliable, but Holland Capital Management has not verified its accuracy and does not guarantee its reliability.

This newsletter does not constitute an engagement with Holland Capital Management, LLC.  The information contained in this newsletter is general in nature and offered only for educational purposes.  No investment decisions should be based upon this newsletter’s contents.  This newsletter is not a substitute for engaging Holland Capital Management for a personal consultation whereby all of your financial circumstances, risk tolerance and investment objectives can be considered.