A few stocks are driving most market gains. Here's why investors shouldn't worry too much.

By Joseph Adinolfi

The S&P 500 tends to see better performance when a handful of companies are leading the way

A handful of Big Tech stocks are once again dominating the stock market. But that's not necessarily a bad thing.

In fact, going back to the 1960s, the S&P 500 has tended to see stronger performance during periods where market concentration has been rising, according to a recent report from Michael Mauboussin, head of consilient research at Counterpoint Global, and Dan Callahan, vice president of Counterpoint.

Many bears like to gripe about the substantial valuation premium currently enjoyed by members of the Magnificent Seven stocks and their peers among the top 10 most valuable U.S. companies.

But these companies are also generating the lion's share of all corporate profits. In other words, economic fundamentals currently justify the premium investors are paying. Although whether lofty projections for future earnings growth ultimately pan out is another matter.

To demonstrate this, Mauboussin and Callahan estimated that the aggregate economic profit for U.S. public companies in the universe of stocks they examined - which included all companies listed on the New York Stock Exchange, Nasdaq and American stock exchange - was $481 billion in 2023. The top 10 companies by market capitalization contributed $331 billion to that total. So, while the 10 largest stocks represented 27% of the total market capitalization, they accounted for nearly 70% of profits.

What's more, while the U.S. market is more concentrated now than it has been since the 1960s, it is still less lopsided than many other developed markets.

Markets in Switzerland, France, Australia, Germany and even Canada all featured heavier rates of concentration among the 10 largest stocks than the U.S. as of the end of last year.

Since the start of 2024, bullish investors' hopes for a rotation away from Big Tech leadership have largely not panned out, but according to Mauboussin and Callahan's research, that rotation may not be necessary for stocks to continue climbing to new record highs.

According to numbers from DataTrek, members of the Magnificent Seven - that is, Apple Inc. (AAPL), Microsoft Corp. (MSFT), Nvidia Corp. (NVDA), Alphabet Inc. (GOOGL), Meta Platforms Inc. (META), Amazon.com Inc. (AMZN) and Tesla Inc. (TSLA) - have driven roughly 76% of the S&P 500's year-to-date gains as of the end of May.

And Mauboussin and Callahan noted that these same stocks drove more than half of the index's return in 2023.

Concentration started rising rapidly in early 2023. Since then, the S&P 500 has experienced above-average returns, rising more than 24% excluding dividends in 2023. The index is up more than 11% since the start of 2024, according to FactSet data.

By comparison, the S&P 500 SPX has delivered an annualized price return of 7.3% since its launch on March 4, 1957, according to Dow Jones Market Data.

-Joseph Adinolfi

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06-05-24 1040ET

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