Increased concentration in equity markets has emerged as a significant concern for investors. The rising dominance of US companies globally, notably the pronounced influence of the technology sector in major stock indices, is typified by the hegemony of a small cadre of prominent stocks, colloquially known as the “Magnificent Seven.” This phenomenon continues to captivate market participants, though signs of vulnerability in the supremacy of these seven market stalwarts are beginning to surface.
The prominence of technology firms in global indices has surged, particularly in the Americas. Over the last decade, the technology sector’s share of the S&P 500 index escalated from nearly 16% to 30% by the end of March 2024. Similarly, in the MSCI Japan index, the sector’s share increased from 11% to 16%, while in the MSCI Europe index, technology stocks now represent 8%, up from 3% in May 2014. This trend is reminiscent of the peak during the dot-com bubble in 2000 when technology accounted for 35% of the S&P 500.
Notably, the current boom in technology differs significantly from the earlier euphoria. Today, dominant companies in the sector are not only profitable but also boast strong balance sheets, underscoring their market hegemony through solid fundamentals and financial robustness. Even with sharply rising interest rates since 2022, these attributes have buffered the sector against potential downturns, unlike the past when less financially stable tech companies suffered.
10 stocks account for 32.5% of S&P500
Investor concerns are increasingly focused on equity concentration. As of the end of April 2024, the ten largest stocks in the S&P 500, which include six of the “Magnificent Seven,” account for 32.5% of the index. The collective market capitalisation of these seven firms—Microsoft, Apple, Alphabet, Amazon, Nvidia, Meta, and Tesla—comprises 29% of the index, exceeding the combined value of all companies in several other sectors of the S&P 500. The market capitalisation of these titans even surpasses the total market capitalisation of the stock markets in Japan, Canada, and the UK.
In 2023, the Magnificent Seven significantly influenced the performance of the US equity market, yielding an average return of 107%. Although their long-term prospects remain favourable, divergence in individual company performances is becoming apparent. For instance, while Nvidia, Meta, Amazon, and Alphabet have each seen share price increases of at least 20% in the current year, Microsoft lags with nearly 10% gains. Conversely, Apple and particularly Tesla have faced significant losses due to various market challenges.
This variability signals a potential end to the robust rally of these seven stocks that began in May 2023. Despite this, Wall Street is likely adept at creating new monikers for emerging stock market leaders or incorporating new entrants into catchy acronyms. However, history suggests that such narratives often lead to eventual market disappointment despite initially high returns.
Polar Capital Global Technology Fund
Prominently featured in Morningstar’s coverage are investment strategies with either robust management teams or those credited with high ratings through analytical algorithms. In this edition, we spotlight the Polar Capital Global Technology Fund, which holds a Morningstar Medalist Rating of Gold for its I Income fund class. Managed by the highly capable Nick Evans (since 2008) and co-manager Ben Rogoff (since 2013), this team excels in the technology sector, backed by their extensive experience and a top-tier supporting team.
The strategy leverages the innovative potential of the technology sector by identifying disruptive new technologies at early stages and targeting companies poised to capitalise on these advancements. The focus is on companies with high barriers to entry, strong pricing power, high growth rates, and robust balance sheets, avoiding speculative ventures without self-sustaining business models. While the fund’s performance has been muted over the past three years due to an underweight position in large-cap stocks like Apple and Microsoft, shifts in these giants’ market performance could potentially turn existing headwinds into significant advantages.
Jeffrey Schumacher is director manager research at Morningstar Benelux. Morningstar analyses and evaluates investment funds based on quantitative and qualitative research. Morningstar is one of Investment Officer’s knowledge partners and takes an analytical look at a specific category of investment funds every Friday.
As Investment Officer Knowledge Partner, Morningstar specialists each Friday shed their lights on a specific category of investment funds. The series replaces the ‘Top 5’ funds overview, which generally addressed funds only available to investors in the Netherlands and/or Belgium. Funds discussed in the Morningstar Fund Radar are available in all countries where IO publishes, including Luxembourg.