How concentrated is the S&P 500 today?
Although it includes only a fraction of the total U.S. stock market, the S&P 500 is arguably the bellwether index viewed by many investors as the best proxy for the U.S. stock market. Since its inception in the 1920s, the index has continually evolved. Not only have the names in the index changed over the decades, but their respective weightings are recalibrated to reflect their relative growth and changing market capitalization over time.
As the chart above illustrates, the degree of concentration of the top 10 names in the index has also changed materially over time. Today, the 10 largest names carry a nearly 30% weight in the index — higher than their prior peak during the dot-com bubble levels and well above the relative weighting over much of the past decade. Notably, the weight of the top 10 has hovered near multidecade highs since 2020, when several of those leading names benefitted greatly from the pandemic and its massive implications for the economy. Such a significant weight means that the contribution of the largest companies in the index to its performance is magnified, as we discuss in our accompanying piece.
Why does this matter? Whether the current valuations of these large companies are justified may be debatable; by some measures, their valuations look stretched. Still, the average net profit margin for the top 10 companies is around one-and-a-half times that of the remaining index constituents, which should justify a higher valuation multiple. An erosion in their profitability could be a catalyst for volatility to bring their valuation closer in line with the broad market. Time will tell whether the hefty valuations of the largest companies are justified. However, this year, they’ve provided an important performance tailwind for investors that were able to weather last year’s storm and stay invested.
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.