{"id":10112,"date":"2022-01-17T14:56:31","date_gmt":"2022-01-17T14:56:31","guid":{"rendered":"https:\/\/zackspcg.com\/blog\/?p=10112"},"modified":"2022-02-26T13:05:36","modified_gmt":"2022-02-26T13:05:36","slug":"is-the-stock-market-too-concentrated","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/is-the-stock-market-too-concentrated\/","title":{"rendered":"Is the Stock Market Too Concentrated?"},"content":{"rendered":"\n<p>Many investors have likely seen stories or headlines about massive\nU.S. companies making up a disproportionately large share of the U.S. stock\nmarket. For instance, maybe you\u2019ve seen this statistic, or one like it, before:\n<em>as of December 31, 2021, the 10 largest\nstocks in the S&amp;P 500 accounted for 30% of the index\u2019s total value<\/em>. In\nother words, just 2% of large-cap U.S. companies account for 30% of the\nbenchmark large-cap index.<sup>1<\/sup><\/p>\n\n\n\n<p>The concern that follows is also quite common \u2013 is the stock\nmarket too concentrated, with the index\u2019s performance ultimately being decided\nby just a handful of companies? <\/p>\n\n\n\n<p>Let\u2019s consult the data. Over the past five years, the\ninfluence of the biggest companies has been apparent: the annualized\nperformance of the S&amp;P 500 (which is market cap-weighted, meaning the\nbiggest stocks have more influence) was +18.47%. But if you weigh all 500\ncompanies equally instead of by market cap, the annualized performance drops to\n+15.73%. On an annualized basis, the roughly 3% spread is significant. __________________________________________________________________________<\/p>\n\n\n\n<p><strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2022_01_17&amp;content=stock_market_outlook_report \">Prepare Your Investments for Inflation, Volatility, and Other Uncertainties <\/a><\/strong><\/p>\n\n\n\n<p>One normal, but an uneasy factor to investing is sudden market changes. As investors experience changes and volatility, remember that feeling uncertain is common. <\/p>\n\n\n\n<p>However, instead of panicking, we recommend\nfocusing on factors that can impact your future investments! To guide you, we\nare offering all readers a look into our just-released&nbsp;<strong>January 2022\nStock Market Outlook report.<\/strong> This report will provide you with our\nforecasts along with additional factors to consider:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><em>Zacks rank S&amp;P 500 sector picks<\/em><\/li><li><em>Zacks view on equity markets<\/em><\/li><li><em>What produces optimism in 2022?<\/em><\/li><li><em>Zacks forecasts for the remainder of the year and the New Year<\/em><\/li><li><em>Zacks ranks industry tables<\/em><\/li><li><em>Sell-side and buy-side consensus<\/em><\/li><li><em>And much more<\/em><\/li><\/ul>\n\n\n\n<p>If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!&nbsp;<br> <br><strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2022_01_17&amp;content=stock_market_outlook_report \">IT&#8217;S FREE. Download the Just-Released January 2022 Stock Market Outlook<\/a><sup><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2022_01_17&amp;content=stock_market_outlook_report \">3<\/a><\/sup><\/strong><\/p>\n\n\n\n<p>______________________________________________________________________________<\/p>\n\n\n\n<p>However, if you zoom out further and compare the 20- and\n30-year annualized returns of a cap-weighted versus an equal-weighted S&amp;P\n500, here\u2019s what we find:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>20-year annualized S&amp;P 500 returns:<ul><li>Market-cap-weighted: +9.51%<\/li><\/ul><ul><li>Equal weighted: +10.86%<\/li><\/ul><\/li><li>30-year annualized S&amp;P 500 returns:<ul><li>Market cap weighted: +10.64%<\/li><\/ul><ul><li>Equal weighted: +11.92%<sup>2<\/sup><\/li><\/ul><\/li><\/ul>\n\n\n\n<p>Big companies having a big influence over the index is a relatively\nnew phenomenon. Five of the biggest S&amp;P 500 companies \u2013 Apple Inc.,\nMicrosoft Corp., Nvidia Corp., Alphabet Inc. (Google), and Tesla Inc. \u2013\naccounted for roughly one-third of the S&amp;P 500\u2019s +28.7% return last year. This\ntrend is significant short-term, but long-term, the data suggests capital will\neventually rotate from high valuation (growth) to low valuation (value) names. <\/p>\n\n\n\n<p>In 2022, there is a key factor to consider, which is that\nthe Federal Reserve now appears likely to start increasing interest rates in\nthe first quarter of this year <em>and to <\/em>begin\ntrimming its ~$9 trillion balance sheet perhaps by summer. Higher interest\nrates and generally tighter monetary policy could create some headwinds for\nhigh valuation stocks, including some of those that reside at the top of the\nS&amp;P 500 by market cap. Since many high valuation names arguably trade at\nhigh multiples because the discount rate for future earnings is so low, a\nhigher discount rate makes future earnings less valuable today. <\/p>\n\n\n\n<p>The argument I\u2019m making here is not that it\u2019s time to turn\nbearish and\/or to expect below-average returns. My argument is that investors need\nto focus on every company in their portfolio, scrutinizing each stock to ensure\nthe company is generating strong cash flows, maintaining solid gross profit\nmargins (particularly in an inflationary environment), and delivering\nbetter-than-expected earnings consistently \u2013 all while trading at historically reasonable\nmultiples.<\/p>\n\n\n\n<p>This task will be tough in 2022, with earnings growth rates\ncoming back to Earth as seen in the chart below.<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/02\/pic1-4.png\" alt=\"\" class=\"wp-image-10113\"\/><figcaption> Zacks Investment Research<sup>4<\/sup> <\/figcaption><\/figure>\n\n\n\n<p>In the past 10 years or so, capital has rotated quite a bit\naway from the value and small-cap stocks and towards growth and large-caps,\ngenerally speaking. Much of the growth surge happened because of technology\u2019s\ncontinued rise, which accelerated greatly during the pandemic. Each of the five\nstocks I mentioned at the start of this column is riding that wave.<\/p>\n\n\n\n<p>I think the question from here becomes whether capital \u2013\nparticularly in a rising interest rate environment \u2013 starts to rotate into\nother areas of the market that are now trading at a discount. The S&amp;P 600\n(an index of small-cap stocks), for example, currently trades at about 15x\nforward earnings, which makes small-cap stocks about 30% cheaper than their\nlarge-cap counterparts. Mid- and large-cap value stocks also look increasingly\nattractive on a relative basis.<sup>5<\/sup><\/p>\n\n\n\n<p>2022 may be set up as a year where some of the market\u2019s\nconcentration in high valuation stocks and a limited set of names gives way to\ncapital rotation into undervalued companies that still generate strong earnings\nand cash flow. For investors, I think that means paying much closer attention\nto what you own and making a stock selection the top priority in the new year.<\/p>\n\n\n\n<p><strong>Bottom Line for\nInvestors<\/strong><\/p>\n\n\n\n<p>For all the earnings and growth volatility generated by the\npandemic over the last two years, the U.S. stock market has charged ahead. In\n2021, equity investors who stayed the course likely experienced above-average\nreturns with below-average volatility \u2013 certainly not what you might expect in\na year as bizarre as that one.<\/p>\n\n\n\n<p>I think 2022 will be more challenging \u2013 not because the stock\nmarket is poised to do poorly or because the risk of recession is high, but\nlargely because earnings growth faces tough comparisons and the Federal Reserve\nwill be tightening monetary policy throughout the year. For investors, I think\nthis setup means making stock selection a priority. The first step: check your\nportfolio high multiple growth companies, which may feel stiff headwinds in a\nrising rate environment. <\/p>\n\n\n\n<p>I also recommend staying focused on what matters \u2013 protecting your long-term investments. Even when the market experiences highs and lows, there are ways to do this. I am offering all readers our&nbsp;<strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2022_01_17&amp;content=stock_market_outlook_report \">Just-Released January 2022 Stock Market Outlook Report.<\/a><\/strong><\/p>\n\n\n\n<p>You\u2019ll discover Zacks\u2019 view on:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><em>Zacks rank S&amp;P 500 sector picks<\/em><\/li><li><em>Zacks view on equity markets<\/em><\/li><li><em>What produces optimism in 2022?<\/em><\/li><li><em>Zacks forecasts for the remainder of the year and the New Year<\/em><\/li><li><em>Zacks ranks industry tables<\/em><\/li><li><em>Sell-side and buy-side consensus<\/em><\/li><li><em>And much more<\/em><\/li><\/ul>\n\n\n\n<p>If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!<br><\/p>\n","protected":false},"excerpt":{"rendered":"<p>For the last 5 years, S&#038;P 500 performance has been driven by a few huge companies &#8230; but that dominance could be changing.<\/p>\n","protected":false},"author":3,"featured_media":8874,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71],"tags":[],"class_list":["post-10112","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/10112","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=10112"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/10112\/revisions"}],"predecessor-version":[{"id":10216,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/10112\/revisions\/10216"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=10112"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=10112"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=10112"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}