Game of Trades: History Shows That This Is Not Sustainable
While the stock market is closing in on new all-time highs, there’s one big reason to give investors pause. That has to do with market concentration. That’s a fancy way of saying that the market’s moves are now dominated by a very small number of mega-cap stocks.
The last time market concentration was this high occurred during the peak of the tech bubble. And going back further, only the Great Depression saw a higher level of concentration.
Simply put, this trend isn’t sustainable. While the Nasdaq recently rebalanced to take some weight out of the mega-cap tech stocks, the move may not be enough. Historically, market concentration will melt up at a parabolic level before a recession brings valuations down.
That suggests that a major market downturn could hit high-flying tech stocks the most. Given how these companies trade relative to their historic valuations, they could drop even as the rest of the market holds steady. The end result would still be a market correction.
The absence of a recession this year will likely push the big-cap tech companies higher after they recover from the current selloff thanks to the Fitch Ratings downgrade of the U.S. debt market. Since there hasn’t been a burst bubble yet, there’s more room to run. On a valuation basis, today’s mega-cap tech stocks are still cheaper than other concentrated stocks at their historic peaks.
That suggests investors could still make money in mega-cap stocks like Apple (AAPL), Microsoft (MSFT), and Nvidia (NVDA). Just watch out for a recession.
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