Top Wall Street Analysts Flag US Market Concentration Anxiety, Advise Investors To Adopt 'Barbell Approach'

Goldman Sachs has flagged an increasing concern over the U.S. stock market’s heavy concentration and the dominant sway of its largest tech stocks, urging investors to broaden their geographical diversification.

According to Goldman Sachs equity analyst Ben Snider, “Concentration within the US equity market has surged to a multi-decade high,” with the 10 largest U.S. stocks now representing “33% of S&P 500 market cap and 25% of S&P 500 earnings.”

This level of market concentration, the highest in decades, has skewed overall market performance, propelling the S&P 500 by 30% over the past year, while the median index constituent, as tracked by the Invesco S&P 500 Equal-Weight ETF RSP only saw an 11% rise. The phenomenon has sparked widespread anxiety among the investment bank’s clients, wary of the “extreme current degree of market concentration” as unprecedented in recent history.

Peter Oppenheimer, Goldman Sachs’ chief global equity strategist, underscored the fleeting nature of corporate dominance, noting, “dominant companies rarely stay the best performers over long periods of time.”

Historical data supports this claim. Just over 10% of the Fortune 500 companies from 1955 maintain their status to the present day. This sheds light on the potential risks of over-concentration in today’s market giants.

A Call for a Barbell Strategy: Despite high concentration, today’s companies are not valued like those from the dot-com era. The current U.S. top 10 stocks boast higher profit margins and return on equity (ROE) than their predecessors. Valuations, while robust, are justified by their superior returns on capital.

However, Goldman Sachs noted that “investors face a flatter trajectory for equity markets over the next few years as a higher cost of capital and less globalization mean lower returns.”

Analysts advised investors to adopt a “barbell approach” to investing. This strategy recommends a mix of defensive companies with strong balance sheets, mature cash-generative firms, and smaller-cap entities with lower valuations.

Spotlight on Japan: Japan emerged as a particularly promising market. Goldman Sachs sees it as a “restructuring opportunity” where the bank is overweight.

Moreover, investors favor the healthcare sector — excluding Japan — for its combination of relative cheapness. It also has high growth potential, likely to benefit from advancements in AI technology.

European GRANOLAS, a group of 11 major companies in the STOXX 600 – including GSK plc GSK, Roche Holding Ltd RHHBY, ASML Holding N.V. ASML , Nestle S.A. NSRGY, Novartis AG NVS, Novo Nordisk A/S NVO, L’Oréal Co. LRLCY, LVMH-Moet Hennessy Louis Vuitton LVMHF, AstraZeneca plc AZN, SAP SE SAP, and Sanofi SNI – are highlighted for their lower valuations compared to their U.S. counterparts and solid performance.

“These stocks trade at a lower valuation (around 20x P/E) than the Magnificent 7 and have performed well,” Goldman Sachs wrote.  

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