What Could Possibly Go Wrong?

Much has been written recently about the Magnificent Seven and the rising concentration risk in U.S. equities. Just seven stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla – are accounting for more than 60% of the S&P 500 index’s return over the last year. We posted a piece about it ourselves a couple of weeks ago.

Now a recent report from Deutsche Bank offers a disquieting perspective on this concentration risk.

By measuring the performance of the top 10% of stocks in comparison to the market as a whole, the report reveals an alarming parallel to the prelude of the Great Depression in 1929. At that time, stock market concentration had reached a peak, with the majority of returns being driven by only a small percentage of companies.

They say history doesn’t repeat, but it often rhymes. Narrow market breadth doesn’t mean a market collapse is around the corner. Equity markets can and often do remain concentrated for extended periods of time without a correction.

However, the lack of diversification and the outsized influence of a small number of stocks on the market’s performance is an indication of complacency and, ultimately, unwarranted exposure.