The magnificent 7 stocks are just too big! Think again

 

The truth is that the U.S. stock market was far more concentrated in the 1950s and 1960s.  Looking at Schlingemann and Stulz (2022), for example, we see that:4

• In the mid-1950s, just three stocks accounted for about 28% of the market cap of the whole market (Figure 8). Obviously, this implies the market then was much more concentrated than seven stocks being 29% of the S&P 500 today.

• For many decades, the biggest stock in the market was always one of the following three: IBM, AT&T, or GM (Figure 6).

• A single stock (AT&T) was 13% of the whole market in 1960 (Table 5), as opposed to today where our largest stock (Apple) is a mere 7% of the S&P 500.

• In terms of employment, concentration was also far higher previously.  The authors write, “For 1953, GM is the top firm in market capitalization. It employs 1.39% of non-farm employees. In 2019, Apple’s employment contribution is 0.11% (or less than one twelfth GM’s employment contribution in 1953).”

4. Schlingemann, Frederik P., and René M. Stulz. “Have exchange-listed firms become less important for the economy?.” Journal of Financial Economics 143.2 (2022): 927-958.

From Acadian 

Yes, I have been worried about the size of the "magnificent seven" and its impact on benchmarks and passive investing, yet the story is a little bit more complex. If you look at 1980 to the present, the sizes of these stocks are large as a percentage of the total market; however, if we go back further in time, we have a very different picture. I should have done more work to think about investment history.

The question is not about the size, but the distortion of the benchmarks that are used to handicap managers and are used for massive passive investing. If you invest in the SPX, you will have to give a large portion your money to seven stocks. We just don't know what will happen if there is an exogenous shock to the markets and there is a large exit from equities. Those seven will see a large outflows; nevertheless, does this create a special problem or will it just be a fact of life.