Navigating a concentrated U.S. stock market
On its own, recent concentration might not be a reason for investor fears.
- The U.S. equity market has become concentrated, with a handful of stocks driving a larger percentage of the market’s gain than at any time since the 1970s.
- Although the last two periods of high market concentration ended in a recession and a burst valuation bubble, high concentration alone might not be a worrisome issue for investors.
- Valuations matter, and the forward price-earnings ratios of stocks in the information technology sector are about half of what they were before the technology stock bubble burst in the early 2000s.
- Higher market concentration may also be an opportunity for active stock selection due to a higher variance of earnings surprises.
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