Big tech stocks don’t just drive the U.S. stock market, they unite the world. U.S. stocks currently make up 70% of the MSCI World Index, a benchmark of large- and mid-cap stocks from 23 developed markets. This level represents the highest country weighting since the index’s inception in 1986. Correspondingly, it also has the lowest exposure to non-US stocks. The top five U.S. large-cap stocks (Apple, Microsoft, Nvidia, Amazon, and Meta) account for nearly one-fifth of the index. The MSCI World Index reweights regions and countries based on broader economic trends. In the 1980s, before the asset price bubble, Japanese stocks accounted for more than 40% of his holdings. In the early 2000s, strong economic growth saw the European market grow to more than a third of the index’s weight. However, no single market has achieved such a high level of concentration as the US market. To put this in perspective, “If you passively allocate every dollar in your retirement account to URTH,” the iShares ETF that tracks the MSCI World Index, “70 cents to U.S. stocks and 18 cents to the top five stocks.” Goldman Sachs managing director Scott Rabner said in a Feb. 12 memo. Lack of diversification is risky because it makes global markets dependent on company-specific factors. However, for asset managers, especially those focused on generating returns in the short term, there are no clear diversification options to achieve growth. Risks Peter Berezin, chief investment strategist at BCA Research, said the concentration was reminiscent of what preceded the market crash. He noted that the market was highly concentrated, not just in 2000, but in the late 1920s and early 1930s, which coincided with the market’s highs. Ironically, stock markets tend to rise during periods of increased concentration, Berezin said, noting it is unclear whether there will be further increases in concentration. “The market is in a kind of dangerous situation right now,” Berezin said. “The risk of something going wrong has increased significantly, so long-term investors are looking at what they’re seeing now with this rally in mega-cap tech stocks as a sign that the party will probably be over by the end of the year. I think we should embrace it.” The reason why U.S. stocks are more tilted than the rest of the world is because the stock prices of major tech companies are rising on bets that artificial intelligence will boost profits. It is in. Nvidia was the clear winner of last year’s AI-powered rally, surging more than 200%. Metaplatform, Alphabet, Microsoft, and Apple also posted strong gains last year. Four of the group’s five stocks have increased in value since the beginning of the year. NVDA GOOGL, META, MSFT, AAPL Big Tech Mountain 1Y Winners of the Past Year “The premiums they demand are dangerous for us.As long as the “Magnificent Seven” has momentum, short-term portfolio performance will be , both good and bad. ” Philip Colmar, managing director and global strategist at MRB Partners, mentioned the top seven U.S. stocks by market capitalization. “At the end of this kind of warm-up, everything gets so bubbly and euphoric that if you don’t participate, you risk being canned.” The strategist also said the current high-concentration bull market and He also highlighted similarities to the dot-com bubble of the late 1990s, when many short-term investors who diversified away from technology in 1999 were wiped out just before the bubble burst in the early 2000s. On the other hand, while high concentrations are generally not healthy for markets, “there is a much more aggressive risk in not owning these stocks than in owning them. It’s all over the place,” said director Mike Dixon. Director of Research and Product Development at Horizon Investments. “If you’re an active manager, it’s impossible to be significantly overweight in all these stocks. So from an active manager’s perspective, this is definitely difficult. But that doesn’t necessarily mean it’s It doesn’t mean it can’t keep happening,” Dixon said. Are there opportunities elsewhere? Another factor in the lack of diversification is that funds from foreign markets are flowing back to the United States. In particular, the confidence crisis in China’s stock market and the geopolitical crisis in Europe have worsened sentiment in major overseas markets. Colmar, who recommends diversifying away from the U.S. market, highlighted Japan, one of Warren Buffett’s top picks, as a bright spot in Asia. Colmar said the country is a tactical buy, even though recent economic growth suggests the country is in recession. “We hope that the national statistics will gradually improve, which will support this case,” Colmar said. “But I don’t think it starts there. I think it starts with the global trade cycle.” Combined with domestic momentum from a weaker yen and government support, he said it could be unleashed. said. Japan’s Nikkei Stock Average has risen more than 14% in 2024, outpacing the S&P 500’s 4.9% rise. Over the past 12 months, the Nikkei Stock Average has risen 39.3%. It’s also trading near record levels not seen in more than 30 years. Meanwhile, portfolio managers have mixed views on the opportunities in European stocks. Profits for European companies as a whole are outperforming. Meanwhile, general pessimism about the eurozone means stocks are trading at a discount, creating opportunities, Colmar said. “In a world where there is decent underlying global growth and perhaps a higher bond yield environment, you want to be in a position to have earnings support and valuations on your side,” the strategist said. However, Berezin remains pessimistic about the eurozone’s prospects. He advised investors to focus on sectors rather than regions when evaluating allocations. European stocks are generally cheap due to the region’s lack of tech stocks, but the region’s tech holdings are “actually quite expensive,” Berezin said. Take Dutch chipmaker ASML as an example. Europe’s Stoxx 600 index is up just 2.6% since the beginning of the year, lagging the U.S. composite market index. Each country’s index has not improved much. Britain’s FTSE 100 is down 0.3% since the start of the year, while Spain’s IBEX 35 is down more than 2%. Germany’s DAX and France’s CAC 40 are up about 2% and 3%, respectively, but they still underperform the S&P 500.
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