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Historically, higher concentration in the top ten names in the S&P 500 has coincided with periods of heightened volatility.

Volatility rises with market concentration chartMega-cap technology names have driven much of the market’s rebound since March 23, boosting their already-sizable relative weightings versus the rest of the market. As a result, popular market-cap-weighted indexes, such as the S&P 500, have become even more highly concentrated in a few large names. While higher market concentration levels alone are not necessarily cause for alarm, history does give us some indication — and a potential warning — of what to expect during these periods.

As shown in the chart above, periods of greater market concentration have typically been associated with higher volatility. Looking back to periods such as the early 1990s and 2000s, market volatility (as measured by 12-month standard deviation) has typically risen as the largest stocks increasingly dominate the index. Intuitively, this makes sense, as any price fluctuations in those names will have an increasingly disproportionate impact (either positively or negatively) on the performance of the overall index as they become a greater part of the overall stock market or a related index.

Today, the top ten stocks in the S&P 500 account for nearly 30% of the index — a record in recent decades. If history is a guide, investors should be prepared for greater market volatility driven by those largest names. Certainly, those stocks could continue to climb for some period, but it’s impossible to put a timetable on any reversal. That said, investors should be aware that the market’s narrowing leadership may result in a bumpier ride at some point, when those stocks fall out of favor.

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.

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