The S&P 500 index closed at a new all-time high of 5,321.41 on May 21, propelled in part by the top 10 holdings of the index. These top 10 stocks have played a significant role in driving the exceptional returns of the S&P 500, contributing more than a third of its 16% annualized total return over the last five years. However, concerns have emerged over overconcentration risks, as these top 10 stocks now represent about 32.5% of the index. This has raised fears of a possible market downturn, despite the index continuously setting new record highs.
The S&P 500 index is a widely-used benchmark for large-cap U.S. equities, representing approximately 80% of the available market capitalization in the U.S. stock market. The index tracks the performance of 500 publically traded large U.S. companies across all sectors, making it a key indicator for the overall performance of the broader market. The S&P 500 has slightly more than 500 components, as some companies have multiple classes of shares listed.
The top 10 stocks of the S&P 500, by weight, have driven the stellar performance of the index in recent years. These stocks collectively represent about 32.5% of the index, the highest level in decades. While there are concerns about overconcentration risks, historical analysis shows that elevated concentration levels have been seen before in the index’s history. Additionally, Goldman Sachs Research found that the top 10 stocks have boosted the index’s returns, with current valuations lower than during the dotcom bubble.
The Nasdaq Composite index, which hit a new record high of 16,832.63 on May 21, is a market-capitalization weighted index that serves as a barometer for the technology sector. The index includes stocks listed on the Nasdaq exchange and represents over 50% of the tech sector. Meanwhile, the Dow Jones Industrial Average (DJIA) tracks 30 U.S. blue-chip stocks and is price-weighted, with higher-priced stocks carrying greater influence.
Despite concerns about overconcentration in the top 10 holdings of the S&P 500, positive financial performance and significant potential for AI-related growth have helped quell fears of a market downturn. Many of the top 10 stocks are well-positioned to benefit from the AI boom, with strong earnings growth reported in the first quarter of 2024. Wall Street expects continued earnings growth for the S&P 500, with the top 10 stocks estimated to generate a combined $150 in EPS for the current fiscal year.
In conclusion, while overconcentration in the top 10 holdings of the S&P 500 is a valid concern, robust financial performance and AI tailwinds have supported the index’s rally. Investors should remain cautious and conduct their own due diligence before making investment decisions. The outlook for the S&P 500 remains positive, with new record highs potentially on the horizon.
