Magnificent 7 stocks account for 35% of S&P 500 Market capitalization. Is this overcentration an anomaly or a trend?

Let’s explore 200 years of fascinating history of US Stock Market concentration.

Overconcentration in a few stocks is not a recent phenomenon, the US stock market has often been even more concentrated. in the past.

According to Bryan Taylor of Finaeon, market concentration has evolved through seven distinct phases, each driven by major economic shifts.

1. 1790 – 1840: The Banking Era
Banks and insurance firms dominated, holding 90% of market capitalization.
They fueled the post-Civil War expansion of private enterprise.

2.1840 – 1875: Railroading of all other sectors
After the Civil War ended, the United States built railroads to connect the nation. Railroads accounted for nearly 60% of the US stock market.

3.1875 – 1929: Utilities and Consumer Revolution
The top 10 companies accounted for 25% of Market capitalization dominated by Standard Oil, General Electric, General Motors, Eastman Kodak, Sears, IBM, and AT&T. The market peaked during the roaring 20s.

4. 1929 – 1964: Post-Crash Stability
The government intervened directly in the economy to try and avoid another Great Depression. AT&T, General Motors, IBM, Standard Oil, General Electric, du Pont, and U.S. Steel were the Magnificent Seven of the 1930s, 1940s and 1950s. Those seven companies remained among the ten largest companies during most of those three decades.

5. 1964 – 1994: Declining Concentration & Lower Returns
Market concentration fell from 30% to 15%. This period saw stock returns well below historical averages.

6. 1993 – 2014: Tech Boom, Bust & Recovery.
The Dot-Com crash and 2008 financial crisis led to market fragmentation, by 2014, the top 10 firms held just 14% of the total market value. The S&P 500 experienced negative returns between 2000 and 2010, often referred to as the "lost decade" for stock investors.

7. 2014 – Present: Tech titans take over, the new Magnificent 7
The mag 7 valuations are in Trillions
Apple($3.7T),
Nvidia($3.4T),
Microsoft($3.1T),
Amazon ($2.4T),
Google ($2.3T),
Meta(1.9T) and
Tesla ($1.2T)
Together account for 35% of S&P 500. S&P 500 has gained 25% in 2024 — marking the fourth 20%-plus year in the last six.

Interestingly, stock market returns were lower during long period of declining concentration.

History shows us that outliers, rather than averages, drive progress and reshape markets.

So the overconcentration is the wrong question and the right question is the valuation.

Are they overvalued?

what do you think?

Disclaimer: Views are personal and should not be considered investment advice.

My blogs are “Notes to Self”—a way to bookmark inspirations, learning, and random ponderings.

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