Is the S&P 500 Really Too Concentrated?  | | Robert Ross
Speculative Assets Specialist | Anyone who reads my work knows I have a bullish bias. The math is simply too compelling. For instance, the fact is stocks go up most years. Since 1921, 75% of all years the S&P 500 finished in positive territory. That alone is a good reason to lean bullish. Bull markets also tend to last much longer than bear markets. In fact, the average bull market lasts 991 days compared to 289 for bear markets. That means bull markets last nearly three-times longer than bear markets. And here's another key point: the overall returns during bull markets far outweigh the losses from bear markets. According to data from Morningstar, the average bull market gains around 112%, while the average bear market results in losses of about 35%. The sheer magnitude of the upside makes it mathematically advantageous to maintain a bullish bias over the long term. When you combine the duration, frequency, and magnitude of bull markets, it's clear why staying bullish tends to be a winning strategy. And I know our Breakout Fortunes subscribers like it too considering we've closed seven triple-digit gains in the last 12 months alone. But there's one bearish argument making the rounds now that I see a lot of investors falling for. And I'm going to debunk it today. "It's Only Seven Stocks" Going into 2024, one of the most common things I heard from bearish investors was that there were only "seven stocks" propping up the market. I did not disagree with the premise... the S&P 500 finished up 26% in 2023 thanks to an average 111% gain for the Magnificent Seven tech stocks. Without those seven stocks, the index would have only risen 8%. It was a similar story in 2024, as the Mag 7 stocks surged an average of 65% compared to only a 5.6% gain for the remaining 493 stocks in the index. 
View larger image I get why people were mad about this. If you didn't own those seven stocks - or worse, were told to stay away from them - the last few years, you had very lackluster returns. And nothing drives people crazier than seeing other people make money. But after this incredible run, these Mag 7 tech stocks account for a massive percentage of the S&P 500. In fact, the top 10 stocks in the index - seven of which are in the Mag 7 - account for 39% of the index. 
View larger image The concentration is now higher than even at the height of the Great Depression... 
View larger image All this data is compelling from a bearish perspective until you understand this is not a unique phenomenon. Let the Pearl Clutching Begin I do concede that having a few stocks propping up the index can be a risk. But when it's the best companies in the world with massive earnings growth trading at reasonable valuations, it severely reduces the risk. And most compelling is that, compared to the rest of the world, the U.S. stock market is not that concentrated. All you need to do is look at the stock market concentration data for other countries around the world. For instance, the average weighting of the top 10 stocks for global stock markets is 58.1%. And while the U.S. top 10 stocks account for 39% of the S&P 500, only two countries - India and Japan - have a smaller percentage of their top 10 holdings. 
View larger image In other words, when you compare concentration risk in U.S. markets to every other major stock market in the world, the S&P 500 is far less concentrated than their peers. You'll never hear the bears bring up this point... Because their goal is to convince you the U.S. stock market is on the verge of an epic collapse. At some point, the bears will have their day in the sun. But if an investor you read has been bearish the entire way up over the last two years - the best two year stretch since 1997 and 1998 - maybe it's time to read someone else. Because they're not doing you or your portfolio any favors. Stay safe out there, Robert Want more content like this? | | | | | | 
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