Nasdaq Rebalance Spotlights Risks from Supersized Set of Stocks

17 July 2023

2 min read

Soaring Mega-Cap Stocks Warrant Earnings and Valuation Scrutiny

Left chart compares the market cap of 10 largest stocks in S&P 500 with four equity regional benchmarks. Right chart compares the change to valuation and earnings growth forecasts for the 10 largest S&P 500 stocks versus the rest of the market.

Past performance and current analysis do not guarantee future results.
S&P 500 top 10 are the 10 largest weights in the benchmark: Apple, Microsoft, Alphabet Inc., Amazon.com, NVIDIA, Tesla, Meta Platforms, Berkshire Hathaway, UnitedHealth Group and Exxon Mobil Corporation. Index median calculation excludes companies with negative earnings (losses) or those that lack estimates. Price/forward earnings and forward earnings-per-share (EPS) estimates are based on consensus earnings forecasts for the full-year 2023.
As of June 30, 2023
Source: Bloomberg, DAX, FactSet, FTSE, MSCI, Nikkei, S&P and AllianceBernstein (AB)

Even benchmark-makers are starting to address the supersized influence of heavyweight stocks. Nasdaq’s plan to reconfigure the weights of its constituents should prompt investors to think about the broader concentration risks in US equity markets, particularly in passive portfolios.

Nasdaq’s decision to carry out a “special rebalance” of its leading technology-strong index is a sign of the times. Excitement over artificial intelligence (AI) has fueled exceptional gains for its seven largest constituents—Microsoft, Apple, Alphabet Inc., NVIDIA, Amazon.com, Tesla and Meta Platforms—which accounted for about 55% of the Nasdaq 100 as of June 30. On July 24, the US exchange operator will rejig the composition of the index to reduce the aggregate weight of these seven stocks.

Big 10 US Stocks Dwarf Several Overseas Markets

Concentration risks extend beyond Nasdaq. The broader S&P 500, too, is heavily tilted toward the largest names, mostly from technology and e-commerce industries. The 10 largest weights accounted for 32% of the S&P 500 at the end of June, with a combined market capitalization of $12.2 trillion. That dwarfs the value of leading benchmarks in Germany, China, the UK and Japan (Display).

Valuations of the US mega-caps have skyrocketed. The median price/forward earnings ratio of the big 10 surged by 48% to 28.2x at the end of June, compared to the median increase of just 7% for the rest of the market. Valuations of the top 10 were driven by multiple expansion, as the median forward earnings-per-share (EPS) forecast increased by only 0.2%; for the rest of the market, the median EPS forecast slipped by 0.4%. This suggests that across the broader market, investors can find stocks with relatively attractive valuations for their earnings power.

Finding Growth Beneath the Giants

Some of the tech titans are good investments. But we believe that each stock should be evaluated based on its business fundamentals, earnings outlook and valuation, and positioned in a portfolio in line with its underlying investment strategy. Passive portfolios that hold all the mega-cap stocks at large benchmark weights will be vulnerable to a potentially painful reversal of sentiment.

Active portfolios can search for a wider array of companies that are suited to today’s complex conditions. Investors with a long-term horizon should resist the temptation to indiscriminately pile into the largest stocks and ensure that their portfolios offer diverse sources of growth potential—at the right price.

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams, and are subject to change over time.

Nasdaq Rebalance Spotlights Risks from Supersized Set of Stocks

Big 10 US Stocks Dwarf Several Overseas Markets

Finding Growth Beneath the Giants

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