Many stock indices have recovered substantially from the lows in March. However, a lot of that is simply due to the largest 5 stocks in the market. (Apple, Microsoft, Amazon, Berkshire Hathaway, and Google)
Here is the average return of the top 5 stocks vs. the Wilshire 5000 return minus those 5 stocks (value-weighted).
Average return of the 5 largest stocks and the rest of the market (value-weighted)
While you have seen your returns go up outside those 5 stocks, you can see you are well below your all time high.
The question is how is this gap made up? Do the top 5 stocks fall? Do the bottom thousands of stocks rally? We’ll see what happens.
One topic that has come up recently is the concentration of the stock market. Right now, Apple, Google, Berkshire Hathaway, Amazon, and Microsoft make up a huge part of the market.
Here’s a graph that shows the amount of the stock market the Top 5 stocks represent in terms of total market cap.
Percent of the Total Market Cap the Top 5 Stocks Represent
As you can see we are at the highest levels since the 1980s. While the number of stocks has declined, it wouldn’t cause this big a jump.
The $64,000 question is… does it matter? Let’s look at the average monthly stock return over the next 12 months against stock market concentration.
Average Monthly Return over the next 12 Months vs. Stock Market Concentration
As you can see, there is virtually no trend. The difference from top to bottom is actually a positive 0.8% per month.
What does this mean for the Top 5 stocks going forward? Let’s see those returns.
Future Average Monthly Return over the Next 12 Months for the Top 5 stocks vs. Concentration
This relationship is negative. It makes sense. The top 5 stocks will not become the entire stock market. Thus, the more the represent, the less room they have to grow in the future. The difference is almost -2% per month from the top to the bottom.
Conclusion: Stock market is getting more concentrated. Nothing to worry about by itself, but the top 5 stocks may start to underperform at some point.
