Google, Apple, Facebook, Amazon, and Microsoft logos displayed in front of an EU flag.JUSTIN TALLIS/AFP via Getty Images
Extreme concentration in the stock market is an overstated risk, according to BMO’s Brian Belski.
Just seven mega-cap tech stocks make up a whopping 29% of the S&P 500, but Belski isn’t concerned.
“Our work shows that the stock market has held up just fine in prior periods when the outperformance of mega-cap stocks started to wane,” Belski said.
Extreme concentration in the stock market is an overstated risk and shouldn’t stop investors from buying stocks, according to BMO chief investment strategist Brian Belski.
Belski said in a note on Tuesday that investors “may be overestimating the risks” associated with the heightened concentration. Some have suggested it echoes the type of market environment that occurred near the peak of the 2000 dot-com bubble, but he disagrees.
The “Magnificent 7” mega-cap tech stocks now make up a massive 29% of the S&P 500, according to data from Goldman Sachs. That does represent a risk if investor demand for these tech stocks begins to decline.
But Belski highlights that even if the mega-cap tech stocks do sell-off, the broader stock market could still generate positive returns.
“Our work shows that the stock market has held up just fine in prior periods when the outperformance of mega-cap stocks started to wane,” Belski said.
Belski crunched the numbers and found that in the year after the relative performance of the top 10 stocks in the S&P 500 peaks, the stock market returns an average of 14.3%.
BMO
“In fact, the only period where the index posted a loss occurred in 2001 (Tech Bubble), and as we mentioned quite frequently in recent reports, we do not consider that to be a comparable period despite some recent chatter to the contrary,” Belski said.
The data suggests to Belski that the 490 bottom stocks in the S&P 500 can carry the weight of the overall market if the so-called Magnificent 7 tech stocks falter.
Investors also shouldn’t be surprised if a sell-off in mega-cap tech land does materialize this year because a 10% correction is typical for the second-year of a bull market.
“We would point out that the S&P 500 almost always experiences a technical correction at some point during the second year of bull markets historically, so even if these stocks begin to struggle causing broader market weakness, we do not believe that this alone negates our bull market outlook,” Belski said.
Beyond the mega-cap tech stocks, Belski said the fundamentals appear favorable for the other 490 stocks in the S&P 500. From a valuation perspective, the 490 S&P 500 stocks are trading just slightly above their long-term average price-to-earnings ratio. Meanwhile, their earnings appear to have bottomed in 2023 and are starting to improve.
“We believe reasonable valuation and a recovering earnings backdrop strongly favors these stocks and would recommend that investors position portfolios accordingly,” Belski said.
Read the original article on Business Insider