The 20% S&P 500 is Now Dominated by Three Stocks, Which Account for 20% of Its Value. That Makes Some Investors Nervous.

For the first time since at least 2000, three U.S. stocks — Microsoft Corp., Nvidia Corp., and Apple Inc. — now represent over 20% of the S&P 500's total value, according to Dow Jones Market Data.

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This concentration indicates that these three companies alone are worth more than hundreds of other S&P 500 constituents combined, as highlighted by Bespoke Investment Group. While historical data suggests that higher concentration often aligns with stronger S&P 500 returns, the rapid valuation increase of these major stocks is causing some investor unease, even among those previously optimistic.

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“Strength in Nvidia and other megacaps has masked weakness in many other areas of the market,” said Katie Stockton, founder of Fairlead Strategies, in a report shared with MarketWatch. Stockton noted signs of decline in small caps, midcaps, the Dow Jones Industrial Average (DJIA), and the equal-weighted S&P 500.

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Illustrative of this trend is the ratio of the Russell 2000, which focuses on small-cap stocks, to the S&P 500, hitting its lowest point since 2001, according to FactSet. The divergence between the equal-weighted and cap-weighted S&P 500 has also grown, with the equal-weight index underperforming significantly, touching its lowest level since 2009, per analysts at BofA Global Research.

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The concentration is even more pronounced in the tech-heavy Nasdaq-100, where Microsoft, Nvidia, and Apple comprised 41% of its value as of Wednesday’s close, a level not seen since November 2023. This heavy reliance on a few stocks for the indexes' gains has become a frequent concern among bull-market skeptics, who fear a stall in these stocks could lead to a broader market decline.

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Nvidia recently surpassed the $3 trillion market capitalization threshold, overtaking Apple as the second-largest U.S. stock, which has only heightened these concerns. In an X post that went viral, Richard Bernstein Advisors highlighted that only about 30% of S&P 500 stocks have outperformed the index in 2024, a rarity last seen during the dot-com bubble years of 1998 and 1999.

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Despite the similarities in stock concentration, investors argue the current market environment differs from the dot-com era. The dominance of the largest stocks today largely reflects significant earnings and sales growth. However, the market is forward-looking, and skeptics question how long companies like Nvidia can sustain their rapid growth, given the cyclical nature of the semiconductor industry, noted Richard Bernstein in an interview with MarketWatch.

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Bernstein doubts Nvidia can continue to exceed Wall Street’s expectations for much longer, which he believes overvalues the company's shares. Conversely, he argues that other large-cap index members haven't received adequate recognition. FactSet projects that the ten largest S&P 500 stocks will see a slowdown in earnings-per-share growth in the year's second half, while the rest of the index is expected to accelerate.

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Bernstein pointed out that over 160 S&P 500 companies experienced a 25% or more increase in trailing 12-month net income in Q1 2024 — a strong performance, though not as high as Nvidia, but better than many other megacaps like Microsoft. He suggests this could lead to a scenario where the leading megacap stocks decline while the broader market rises, an early trend seen as Apple and Tesla shares struggled in 2024.

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For months, Bernstein has been advising investors to seek opportunities in other segments of the global equities market, such as U.S. small caps and emerging-market stocks, which could benefit when the Federal Reserve begins cutting interest rates.

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“It’s like a seesaw,” Bernstein said. “There are seven stocks on one side, and everything else in the global equity market is on the other side. Which side do you want to be on — not for the next 10 minutes, but for the next 10 quarters, or the next 10 years?” He advocated for positioning on the broader market side of the seesaw.

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On Thursday, the S&P 500 and Nasdaq Composite closed with slight losses, as gains in consumer-discretionary, energy, and consumer-staples stocks offset losses from Nvidia and other semiconductor names. The DJIA ended higher, driven by a surge in Salesforce Inc. shares, which had dipped following their recent earnings report.

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