Warren Buffett advises individuals to invest in low-cost S&P 500 index funds for long-term gains, rather than attempting to time the market or pick stocks. However, The Kobeissi Letter revealed a concerning trend on Thursday.
What Happened: The top 10 stocks in the S&P 500 are now nearly 800 times larger than the 75th percentile stock, surpassing the concentration levels seen during the Great Depression of the 1930s. This current concentration is also 50% more intense than in 2001.
The dominance of a few major companies within the S&P 500 raises concerns about the potential risks associated with such concentration.
The Kobeissi Letter’s findings coincide with warnings from billionaire investor Chamath Palihapitiya, who highlighted the risks of the S&P 500’s concentration. Palihapitiya pointed out that the top ten stocks account for 40% of the index’s market capitalization, which could lead to significant issues if market volatility arises. He warned that the lack of diversification might result in “massive impairment” during turbulent times.
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Why It Matters: The increasing concentration within the S&P 500 index is a significant development in financial markets. Over the years, the dominance of a few large companies has been growing, leading to concerns about the implications for investors and the broader market. In 2020, the COVID-19 pandemic accelerated this trend as tech giants like Apple Inc. (NASDAQ:AAPL) and Amazon.com Inc. (NASDAQ:AMZN) saw substantial growth, further skewing the index’s balance.
In 2021, analysts began to note the potential risks associated with this concentration, warning that any significant downturn in these leading stocks could have outsized effects on the index’s performance. This concern has been echoed by financial experts who emphasize the importance of diversification to mitigate risks.
Price Action: As per Benzinga Pro, SPDR S&P 500 ETF Trust (NYSE:SPY) fell 3.19% in the past month while Invesco QQQ Trust, Series 1 (NASDAQ:QQQ) dropped by 1.28%, as of last closing session.
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Disclaimer: This content was partially produced with the help of Benzinga Neuro and was reviewed and published by Benzinga editors.
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