7 JULY 2023

When Index Concentration Is High, Consider Quality Companies as an Investment "North Star"

6 min read

Quality companies have successfully navigated good times and bad—but they’ve been particularly resilient when earnings and economic growth have slowed.


The S&P 500 is up significantly in 2023, but the rally has been narrow, with a handful of big stocks driving the market. The fuel? An expected Fed rate cut earlier in the year and a snapback from weaker 4Q 2022 returns. More recently, the drivers have been a flight to “safety,” given that many mega-caps lack exposure to banking woes, and the rapid adoption of artificial intelligence.

In past periods when a small number of stocks have led market returns, performance has tended to broaden significantly over six- and 12-month periods. Over the past 30 years, when equity returns have become particularly concentrated, a broader swath of stocks has then outperformed in 13 out of 14 periods.


Index Concentration Is Back: Looking Beyond the Largest Names Has Paid Off at Prior Peaks

Historical analysis and current forecasts do not guarantee future results.
*The highlighted data points in the line chart are month-end values. The May 2023 data point is high but may not yet be the current peak.
Through May 31, 2023
Source: Morningstar and AllianceBernstein (AB)


The market’s most recent move to “higher ground” wasn’t surprising given concerns over a slowing economy—many forecasts pointed to the best-telegraphed recession in recent memory. Today, the S&P 500’s top 10 largest stocks now trade at a substantial premium to the rest of the benchmark (25.9x vs. 14.6x).

Against this backdrop, we believe that pursuing high-quality growth stocks should be paramount—and that high-quality growth isn’t the exclusive property of the 10 largest companies. Firms with high profitability (such as high return on assets or return on equity) and durable profit margins, accompanied by strong financial backing, have delivered favorable returns when earnings growth has been waning. We believe that these attributes will remain coveted in this environment.


Quality Doesn’t Have to Be so Costly—and Offers Performance Potential

Past performance does not guarantee future results.
*Based on market capitalization
EPS: earnings per share; P/FE: price to forward earnings; ROE: return on equity; ROA: return on assets. Figures shown represent S&P 500 factor performance high to low (Q1 vs. Q5), sector adjusted. 
As of May 19, 2023
Source: Bloomberg, Piper Sandler, S&P and AB


The Takeaway

We believe that, over time, emphasizing a diverse mix of quality stocks that goes beyond the biggest companies can be a solid foundation for excess return potential throughout economic cycles.

Featured AB Investment Strategies

Mutual Fund/SMA ETFs
AB Large Cap Growth Fund
AB Large Cap Growth Portfolio (SMA)
High-conviction portfolio of large-cap growth companies with persistent business growth potential
AB US Low Volatility Equity ETF
An actively managed portfolio of US large-cap equity companies that seeks to outperform the market with less volatility
AB Concentrated Growth Fund
AB Concentrated Growth Portfolios (SMA)
Concentrated, high-quality large-cap equity portfolio with high active share
AB US High Dividend ETF
An active ETF that seeks to provide core US equity exposure with attractive dividend income and the potential for capital growth
AB Concentrated International Growth Portfolio
AB Concentrated International Growth Portfolio (SMA)
Concentrated, high-quality non-US large- and mid-cap equity portfolio with high active share
AB Disruptors ETF
An actively managed strategy that takes a thematic approach to identify disruptive leaders across sectors and geographies
AB Sustainable US Thematic Portfolio
AB Strategic Research Portfolio (SMA)
A benchmark-agnostic equity portfolio built around forward-looking thematic opportunities, not backward-looking indices
AB Sustainable Global Thematic Fund
AB Sustainable Global Thematic Portfolio (SMA)
A benchmark-agnostic global equity portfolio built around forward-looking thematic opportunities, not backward-looking indices
AB Sustainable International Thematic Fund
AB Sustainable International Thematic ADR Portfolio (SMA)
A benchmark-agnostic non-US equity portfolio built around forward-looking thematic opportunities, not backward-looking indices

Important Information

Investing in securities involves risk and there is no guarantee of principal.

Investors should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. For copies of a Fund’s prospectus or summary prospectus, which contain this and other information, visit us online at www.alliancebernstein.com or contact your AB representative. Please read the prospectus and/or summary prospectus carefully before investing.

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Active Trading Risk: The Fund expects to engage in active and frequent trading, which will increase the portfolio turnover rate. A higher portfolio turnover increases transaction costs and may negatively affect the Fund’s return. Currency Risk: Fluctuations in currency exchange rates may negatively affect the value of the Fund’s investments or reduce its returns. Depositary Receipts Risk: Investing in depositary receipts involves risks that are similar to the risks of direct investments in foreign securities. Derivatives Risk: Derivatives may be more sensitive to changes in market conditions and may amplify risks. Dividend-Paying Securities Risk: The Fund invests in securities that pay dividends. There can be no assurance that dividends will be declared or paid on securities held by the Fund in the future, or that dividends will remain at current levels or increase. Emerging-Market Risk: Investments in emerging-market countries may have more risk because the markets are less developed and less liquid as well as being subject to increased economic, political, regulatory, or other uncertainties. Equity Securities Risk: The Fund invests in publicly traded equity securities, and their value may fluctuate, sometimes rapidly and unpredictably, which means a security may be worth more or less than when it was purchased. Foreign (Non-U.S.) Investment Risk: Investments in securities of non-U.S. issuers may involve more risk than those of U.S. issuers. These securities may fluctuate more widely in price and may be more difficult to trade than domestic securities due to adverse market, economic, political, regulatory, or other factors. Global Risk: The Fund invests in companies in multiple countries. These companies may experience differing outcomes with respect to safety and security, economic uncertainties, natural and environmental conditions, health conditions, and/or systemic market dislocations. The global interconnectivity of industries and companies, especially with respect to goods, can be negatively impacted by events occurring beyond a company’s principal geographic location, which can contribute to volatility, valuation, and liquidity issues. Investment Securities Risk: To the extent the Fund invests in other funds, shareholders will bear layers of asset-based expenses, which could reduce returns. Market-Capitalization Risk: Investments in mid-capitalization companies may be more volatile than investments in large-capitalization companies. Market Risk: The market values of the portfolio’s holdings rise and fall from day to day, so investments may lose value. New Fund Risk: The Fund is recently organized, giving prospective investors a limited track record on which to base their investment decision. Non-Diversification Risk: The Fund may have more risk because it is “non-diversified,” meaning that it can invest more of its assets in a smaller number of issuers. Accordingly, changes in the value of a single security may have a more significant effect, either negative or positive, on the Fund’s net asset value. Sector Risk: The Fund may have more risk because it may invest to a significant extent in one or more particular market sectors, such as the information technology sector. To the extent it does so, market or economic factors affecting the relevant sector(s) could have a major effect on the value of the Fund’s investments. Quantitative Model Risk: AB uses a quantitative model to identify investment opportunities for the Fund. There is a risk that market behavior will change and the patterns upon which the models are based will weaken or disappear, which would reduce the ability of the models to generate an excess return.

There is no assurance that a separately managed account will achieve its investment objective. Separately managed accounts are subject to market risk; the market values of securities owned will fluctuate so that your investment, when redeemed, may be worth more or less than its original cost.

AllianceBernstein L.P. (AB) is the investment advisor for the Fund. 

AllianceBernstein Investments, Inc. (ABI) is the distributor of the AB family of mutual funds. ABI is a member of FINRA and is an affiliate of AllianceBernstein L.P., the manager of the funds.

The AB ETFs are distributed by Foreside Fund Services, LLC. Foreside is not related to AB.


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