Some of the largest stocks in the market still dominate returns to a degree that’s greater than in previous years.
For investors, this is a potentially healthier dynamic, with less risk for index-tracking funds and more opportunities for stock-pickers.
It’s natural for there to be clusters of outperformance or underperformance in the markets.
To measure just how concentrated stock returns have been, we calculated the impact that the 10 largest stocks have had on the Morningstar US Large-Mid Index, which essentially tracks 90% of the stock market.
For example, the three largest stocks accounted for less than 10% of returns in most years since 2009, and often just in the very low single digits.
One quirk is that when the market has only a small move, such as 2015’s 0.92% change, or is basically flat as it was in 2011, the results can be distorted.
At such a high weighing in the index, that meant Apple alone–out of 699 stocks in the Morningstar US Large-Mid Index–contributed 13% of the year’s 20.9% gain.
This year, the concentration is less pronounced, even though the top five stocks are still providing above-average contributions to market returns.
Over most of the past decade, the proportion of market returns coming from the largest companies has steadily increased.
Market concentration came to a peak in 2020 when the top five holdings alone contributed nearly 40% of the market’s return for the year.
If our base-case assumptions are true the market price will converge on our fair value estimate over time, generally within three years.
The Quantitative Fair Value Estimate is based on a statistical model derived from the Fair Value Estimate Morningstar’s equity analysts assign to companies which includes a financial forecast of the company.