Are Dispersion and Concentration in the Stock Market Too High?
U.S. large cap stocks, as measured by the S&P 500, delivered a solid performance in the first half of 2024. In January, the index eclipsed an all-time high, and in the five months that followed, it reached 31 more. Volatility has also been relatively subdued. In the first six months, there was only one instance when the index rose or fell by more than 2% (it went up).
But it hasn’t been a story of a rising tide smoothly lifting all boats.
In fact, looking under the hood at individual stock returns reveals quite the opposite. As I write, approximately 40% of stocks in the S&P 500 are at least 10% below their all-time highs, with dozens of stocks still in negative territory for the year.
Many readers likely have a general understanding of how this is happening—a handful of mega-cap technology companies are making an outsized impact, and the effect is bolstering overall returns. Indeed, in the first half of 2024, just four of the “Magnificent Seven” stocks contributed over half of the S&P 500’s total return.
The picture we’re left with is one with historic levels of dispersion and concentration in the S&P 500. And that has some investors worried that year-to-date gains are unhealthy, unbalanced, and susceptible to a quick reversal.
High Dispersion
The term ‘dispersion’ in equity markets refers to a lack of correlated movement among stocks, which is what we’ve seen at near historic levels within the S&P 500 this year. Dispersion rose in the aftermath of the pandemic, as technology stocks soared while many other categories of stocks—particularly value names—lagged. Dispersion fell in 2022 with rising interest rates and the bear market, but it has risen again recently driven by the Magnificent Seven and surging earnings growth tied to Artificial Intelligence.
