Chances are you have read or heard about artificial intelligence or Chat GPT this year. In the stock market, there is a small group of stocks known as the “7 Tech Titans”, which includes leading technology firms exposed to the AI theme. The group of stocks has significantly outperformed this year due to growing excitement about AI, which has in turn increased its weight in the S&P 500. The five largest companies in the S&P 500, which are all part of the 7 Tech Titans, account for 22% of the entire index’s total market capitalization. These five companies include Apple, Microsoft, Amazon, NVIDIA, and Alphabet (the parent company of Google).
The S&P 500 is now highly concentrated, surpassing the previous record set in December 1999. In that era, Microsoft, General Electric, Cisco, Walmart, and Intel collectively represented around 19% of the S&P 500. How have those five stocks fared since 2000? Figure 1 shows their combined weight in the S&P 500 has declined over time, while the weight of today’s five largest stocks has steadily increased. Figure 2 shows the five stocks have produced an average total return of 216% since 2000, compared to the S&P 500’s return of 349%. At an individual stock level, only one out of the five stocks managed to outperform the S&P 500 over the past two decades.
The two charts highlight the importance of diversification. In both instances, the high concentration resulted from the outperformance of a small group of stocks. However, the return data in Figure 2 shows that today’s winners are not necessarily tomorrow’s winners. Diversifying your stock holdings across different sectors and companies can help manage this risk. It’s also important to diversify across bonds and other asset classes, as well as regularly rebalance your portfolio to avoid concentration risk like the S&P 500. Financial markets are constantly changing, and our investment process is designed to preserve capital in times of volatility so you may take advantage of other investors missteps. Our goal is to provide superior after tax, risk adjusted, returns, within the confines of your willingness and ability to take risk.
