Market Concentration: What’s Actually Going On?

A question that I’ve been asked a few times this year is about what impact the top 10 companies now making up a larger share of global stock market indices than ever before can have on peoples investments.

Most of these businesses sit in the technology and AI space, and the concern is usually framed like this: if a handful of very large companies struggle, the whole market could suffer.

It’s a fair question, and one I do take seriously. But it’s also worth stepping back from the headlines and looking at what’s really going on.

These Aren’t Just “10 Companies”

One thing that often gets overlooked is that these aren’t simple, single-product businesses.

Companies like Apple, Microsoft, Amazon and Alphabet are vast groups made up of multiple global operations. In many cases, individual divisions inside these companies are large enough to be household-name businesses in their own right.

Apple’s AirPods business alone generates tens of billions of dollars in revenue each year. Amazon’s cloud division, AWS, is a huge global business in its own right. Alphabet owns YouTube, which reaches billions of users and generates substantial income on its own.

If these businesses were broken up into their component parts and listed separately, the market would instantly look far less concentrated, even though the underlying companies and activities you’re invested in wouldn’t have changed at all.

So part of the “concentration” story is really about how companies are structured, rather than how narrow the opportunity set truly is.

Concentration Isn’t New

Markets have always had leaders.

In different decades it’s been oil companies, banks, industrial firms, or technology businesses sitting at the top. The names change, but there is almost always a small group of companies driving a large share of returns at any given time.

What’s different today is that these businesses are highly profitable, generate real cashflows, and sell products and services used by billions of people every day. That doesn’t mean they’re risk-free, but it does mean their size isn’t based purely on hype or speculation.

Markets Adjust Over Time

Another important point is that index investing isn’t static.

If a company starts to struggle, its value falls and it naturally becomes a smaller part of the index. At the same time, new businesses grow and take their place. You’re not locked into today’s winners forever.

This process has happened repeatedly over many decades. Today’s dominant companies weren’t always at the top, and they won’t be there indefinitely either.

The More Practical Question

Even if market concentration does create periods of higher risk, the real question is: what’s the alternative?

Trying to predict which companies will fall out of favour is incredibly difficult. Moving large amounts to cash brings its own risks. Most alternatives rely on making guesses about an uncertain future.

For many long-term investors, broad diversification across global markets is often discussed as a disciplined approach, although whether it is suitable will depend on individual circumstances.”

The value of investments and any income from them can fall as well as rise. You may not get back the full amount invested.

This article is for general information only and does not constitute financial advice which should be based on individual circumstances.