Are We Mistaking Concentration for Strength?

The US equity market has powered ahead in recent years but much of this strength comes from a narrow and increasingly fragile foundation. A small group of mega‑cap tech stocks has driven the lion’s share of returns, creating a market that appears robust on the surface yet is structurally imbalanced underneath.

The question investors should ask today is simple: Are we mistaking concentration for strength?

The Magnificent Seven, Apple, Microsoft, Amazon, Alphabet, Tesla, Nvidia and Meta, have delivered outsized gains and propelled US indices to new highs. But this surge has led to the highest level of market concentration in modern history. Today, the top 10 US stocks represent roughly 35% of total market capitalisation, almost double their share a decade ago.

This narrow leadership distorts the perception of broad‑based growth. When a handful of companies dictate index returns, investors tied to traditional benchmarks end up holding portfolios that are far less diversified than they appear and are exposed to the same business models, factor tilts, regulatory risks and sentiment swings.

History warns us that such concentration often precedes heightened vulnerability.

During the dot‑com era, market leadership narrowed sharply before collapsing when lofty expectations met reality.

In the past decade, concentration continued to build, rewarding investors but also making markets more sensitive to any stumble from the top names.

Importantly, concentration does not guarantee a downturn. But it does erode diversification, the one true source of free risk management in investing. When returns depend on a single theme, portfolios become increasingly fragile, even if headline indices still look strong.

Our View

While US equities remain a core allocation for global investors, the current level of concentration calls for thoughtful repositioning. Instead of relying heavily on a small cluster of mega‑caps, portfolios can benefit from drawing strength from multiple, uncorrelated sources of return.

A broader positioning framework may include:

• Diversifying across regions, balancing US exposure with opportunities in Europe, the UK, and emerging markets that trade at more attractive valuations.

• Redistributing sector weight, ensuring portfolios are not overly tilted toward technology and communication services at the expense of other structurally sound areas.

• Incorporating different market capitalisations, allowing under‑owned or undervalued segments to contribute to future returns as leadership rotates.

• Blending complementary investment styles, including a mix of growth, value, cyclical, and defensive exposures to stabilise performance across varied market environments.

• Maintaining flexibility, so portfolios can adapt as new sources of market leadership inevitably emerge.

The objective is simple: reduce reliance on a narrow market narrative and reintroduce the diversification benefits that have been diluted by today’s concentrated benchmarks.

Source: Morningstar