Today’s dominance by the “Magnificent Seven” is starting to look eerily similar to how markets were during the 1990s dot-com bubble, according to JPMorgan. In fact, the Wall Street firm warned the level of concentration in the U.S. equity markets is a key 2024 concern, as a handful of stocks continue to power the indexes while the broader market flounders. This year, the S & P 500 has climbed more than 3%, while the equal-weighted index is up just slightly, by 0.4%. The top 10 largest U.S. stocks are increasingly responsible for the bulk of those gains, read a Tuesday note from JPMorgan’s global quantitative strategy team. By the end of 2023, the 10 largest U.S. stocks, which includes all of the Magnificent Seven names, accounted for 29.3% of the MSCI USA. The 10 largest stocks are: Apple, Microsoft, both share classes of Google parent Alphabet , Amazon , Nvidia , Meta , Tesla , Broadcom and JPMorgan . That’s just a little shy of the 33.2% in market share claimed by the top 10 MSCI USA stocks in June 2000, just a few months after the tech bubble burst in March of that same year. “When viewed in a historical context, parallels to the ‘Dotcom Bubble’ era are often dismissed due to the ‘irrational exuberance’ that characterized this period,” Khuram Chaudhry wrote. “Our analysis shows that while there are notable differences, they are far more similar than one may think!” Chaudhry added. .SPX YTD mountain S & P 500 To be sure, the valuations of the top 10 stocks in 2000 were “significantly more extreme” than they are today, Chaudhry said. During the run-up in internet stocks, forward price-to-earnings ratios peaked at an average of 41.2, while the current top 10 are at 26.8. But the analyst noted that the internet had a broader impact on equities in 2000 than the artificial intelligence theme appears to have today, where just a few names are the major beneficiaries. Besides, he said, a look at the forward earnings yield spread, instead of price-to-earnings, of the MSCI USA, including and excluding the top 10 stocks, is wider today than it was over two decades ago. The analyst said the disparity is the largest on record going back to 1994, “eclipsing even the extremes observed over the TMT bubble.” What’s more, the top 10 stocks today are more crowded than they were even in 2000. Together, the largest two stocks, Apple and Microsoft , account for more than 40% of the top 10. All this points to greater market risk in the event of a sell-off, the analyst said. In fact, Chaudhry expects underweighting the top 10 stocks would be the more “prudent approach” for investors. “The key takeaway is that extremely concentrated markets present a clear and present risk to equity markets in 2024,” the analyst wrote. “Just as a very limited number of stocks were responsible for the majority of gains in the MSCI USA, drawdowns in the Top 10 could pull equity markets down with them.” — CNBC’s Michael Bloom contributed to this report.
