Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 557

The Magnificent Seven's dominance poses ever-growing risks

In a recent article on Firstlinks on the extraordinary growth in the Magnificent Seven, the US’ mega-cap tech giants, and the resultant level of concentration in the S&P500 and Nasdaq indices, one reader commented that the level of concentration seen in US markets is actually rather low compared to other developed markets. And also that the current level of concentration in US markets is far from unprecedented. Both these points are accurate, but are they comforting?

To recap, Microsoft (MSFT), Apple (AAPL), Nvidia (NVDA), Amazon (AMZN), Meta (META), Alphabet (GOOG) and Tesla (TSLA) now comprise around 28% of the S&P500; in early March they comprised around 30%. A nearly 43% year-to-date fall in Tesla has been the primary detraction, while Nvidia has gained an incredible 65% over the same timeframe. Over the past five years, these companies have delivered nearly 50% of the performance of the S&P500; they also fell, collectively, 39% during the market’s contraction in 2022, nearly twice as much as the overall index.[1]

In the past, high levels of concentration in US markets have often preceded significant sharemarket falls – the tech wreck is one of the better examples. The 1960s and 70s ‘Nifty Fifty’ period was similar. This period doesn’t have to follow the same path – in fact, Goldman Sachs has just published a paper saying that while narrow leadership in the S&P500 usually occurs toward the top of the market and is followed by a period of significant underperformance, this era’s leaders should continue to outperform. Maybe this time really is different?

It should be noted that concentration at the top end of share markets outside the US is also not unusual, and the performance of a few large or mega-cap companies can significantly drive the performance of a single market. In Australia, financials comprise 30% of the S&P ASX200; while materials constitute a smaller proportion, BHP alone is more than 10% of the index[2]. The Swiss Market Index is only comprised of 20 stocks; a rule was introduced in 2017 to cap any individual stock at no more than 18% of the index when Nestlé, Novartis and Roche accounted for more than 60% of the SMI. The UK is dominated by four companies – AstraZeneca, Shell, HSBC and Unilever, which accounted for 25% of the FTSE100 at the end of February[3].

What's the big deal about the US, then?

So why does concentration in the S&P500 garner so much attention? In large part, this is because US markets dominate global portfolios; increasingly so as the US economy outperforms other developed economies, and as its tech giants dominate global demand for ecommerce, cloud technology and social media, not to mention artificial intelligence. US exposure now accounts for more than 70% of the MSCI World Index; the next highest weighting is Japan at just 6%. The top ten companies in the index comprise more than 20% of the index; Microsoft alone is larger, by weighting, than the United Kingdom[4].


Source: MSCI


Source: MSCI World

Admittedly MSCI World is a developed market index; for a broader comparison, MSCI ACWI (All Country World Index), which covers 23 developed markets and 24 emerging markets, may be more relevant. ACWI has 63% exposure to the US. The top 10 stocks comprise a little less than 20% of the overall index, and includes Taiwan Semiconductors (TSMC) as a lonely non-US significant holding.

It can be a problem for fund managers

Superannuation funds and other large portfolio managers are generally benchmarked against these indices, and the composition of their global equities exposure reflects this. If a fund’s performance is compared to a benchmark, then mega-cap concentration is a real problem.

This issue is playing out in real time for global asset managers. Those who have not been holding – or have even just been underweight - the Magnificent Seven have dramatically lagged those who have, and also lagged low-cost index funds. This puts their entire business model at risk – why pay an active fee when an index fund delivers a better result? As a result, many pension funds and other large institutions have been forced to buy the mega-caps at what they feel are inherently overvalued prices because their performance – and revenues - suffer too greatly if they don’t.

Ultimately, any concern around concentration risk in a portfolio is linked to the principle that diversification smooths and ultimately improves returns over time. This is most relevant for long term investors – traders can afford to be highly concentrated in their portfolios because they’re actively managing positions.

Long term investors – like superannuation funds - are generally looking to hold their positions for five years or more, which has the advantage of minimising transaction costs (including brokerage and tax), which can critically impact net returns. Having a concentrated portfolio over the long term has obvious risks – that you’ve invested in a few stocks that perform poorly, or missed those that are performing well.

This time really could be different

As an individual investor, this may not be a concern for you. If you are invested in the growth option of a retail, corporate or industry super fund, you have some exposure to this risk – but you may feel that you would like exposure to these companies and the US in particular. nabtrade’s customer data is a really interesting insight into investors’ views on this – the number of investors who invest in ASX200 ETFs (usually VAS) is many multiples of the number who invest in ETFs with global exposure.

The ETF with international exposure held by the most investors is Vanguard’s MSCI Index International Shares (VGS) – a replication of MSCI World. Compare this to direct international exposure – more than 90% of direct international trades on nabtrade are made on US exchanges. And which stocks are most popular? Tesla, Microsoft, Apple, Amazon and Nvidia. Perhaps Goldman Sachs is right this time.

 

[1] Source: Refinitiv
[2] Source: S&P Global
[3] Source: S&P Global
[4] Source: MSCI

 

Gemma Dale is Director of SMSF and Investor Behaviour at nabtrade, a sponsor of Firstlinks. Index charts as at 12 February 2024. This material has been prepared as general information only, without reference to your objectives, financial situation or needs.

For more articles and papers from nabtrade, please click here.

Full Disclaimer: The content is produced and distributed by WealthHub Securities Limited (WSL) (ABN 83 089 718 249)(AFSL No. 230704). WSL is a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited (ABN 12 004 044 937)(AFSL No. 230686) (NAB). NAB doesn’t guarantee its subsidiaries’ obligations or performance, or the products or services its subsidiaries offer. This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. Past performance is not a reliable indicator of future performance. Any comments, suggestions or views presented do not reflect the views of WSL and/or NAB. Subject to any terms implied by law and which cannot be excluded, neither WSL nor NAB shall be liable for any errors, omissions, defects or misrepresentations in the information or general advice including any third party sourced data (including by reasons of negligence, negligent misstatement or otherwise) or for any loss or damage (whether direct or indirect) suffered by persons who use or rely on the general advice or information. If any law prohibits the exclusion of such liability, WSL and NAB limit its liability to the re-supply of the information, provided that such limitation is permitted by law and is fair and reasonable. For more information, please click here.

 

RELATED ARTICLES

Are record market highs bullish or bearish?

Howard Marks warns of market froth

The value of ‘value’ and Benjamin Graham’s three core beliefs

banner

Most viewed in recent weeks

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Latest Updates

Superannuation

Super crosses the retirement Rubicon

Australia's superannuation system faces a 'Rubicon' moment, a turning point where the focus is shifting from accumulation phase to retirement readiness, but unfortunately, many funds are not rising to the challenge.

Economy

Should Australia follow Trump's new brand of capitalism?

A new brand of capitalism may be emerging - one where governments take equity in private companies. Is it state overreach, or a smarter way to fund public goods without raising taxes?

Gold

Why gold may keep rising - and what could stop it

Central banks are buying, Asia’s investing, and gold’s going digital. The World Gold Council CEO reveals the structural shifts transforming the gold market - and the one economic wildcard that could change everything. 

Investment strategies

Fact, fiction and fission: The future of nuclear energy

Nuclear power is back in the spotlight, including in Australia. For investors exploring the sector, here are four key factors to consider in this evolving energy landscape. 

Taxation

The myth of Australia’s high corporate tax rate

Australia’s corporate tax rate is widely seen as a growth-killing burden. But for most local investors, it’s a mirage - erased by dividend imputation. So why is it still shaping national policy? 

Taxation

Should we change the company tax rate?

The headline 30% corporate tax rate masks a complex system of dividend imputation and franking credits that ensures Australian shareholders are taxed only once, challenging traditional measures of tax competitiveness. 

Investing

Noise cancelling for investors

A lot of the information at an investor's fingertips today has little long-term value. The modern investing greats are not united by access to faster information, but by their ability to filter out what doesn’t matter.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.