A Wealth of Common Sense: Is the U.S. Stock Market Too Concentrated?

Currently, six stocks in the S&P 500 have market caps of over $1 trillion. That’s up from zero a decade ago. And the largest companies have been flirting with a $3 trillion market cap.

Individual companies in the group, such as Nvidia (NVDA) now have a market cap higher than the entire Chinese stock market. The numbers are incredibly large. It also raises the question of market concentration.

Historically, when just a few stocks have dominated the overall market, there has been a fast reversal.

The tech bubble of the late 1990s saw a handful of tech stocks reach high valuations. Those crumbled. And the stock market concentration crumbled with it.

Just 10 years ago, the top 10 stocks in the S&P 500 made up 20 percent of the index. Today, that ratio is 34 percent.

There are two ways this imbalance can return back to its original trends. First, either these big tech companies underperform and trend lower. Or, other companies could outperform while big tech stocks take a breather.

In either event, investors may want to lighten on the big tech names now. And look for other investment opportunities.

While concentration may continue to increase, when the trend reserves, it could change quickly. Investors may want to take some profits on tech stocks and look for other opportunities now.

To read the full implications of today’s high market concentration, click here.