Goldman Sachs – A Global Market Review

This Goldman Sachs article focuses on the topic of concentration risk of stock market indexes

Over the last 20 years, the United States equity market has grown to be over 50% of global market capitalisation, driven mainly by its superior relative returns. This US equity market dominance has been boosted by its bias towards growth companies, with higher reinvestment rates leading to a faster compounding of growth potential.

Moreover, there is talk of the US equity market being overly concentrated in fast-growth, low-capital base technology companies – the so called ‘Magnificent Seven’ – which has only become more pronounced with the exuberant rise in AI technology stocks over the past few years. The largest ten listed US companies now account for over 30% of the S&P 500 stock market index. (Magnificent 7 Stocks: What You Need to Know (investopedia.com) 

Passive investment flows through exchange-traded funds (ETFs), exchange-traded commodities (ETCs) and tracker funds which invest across broad stock market indexes and are also thought to heighten the momentum of tech stock valuations, creating a perceived disconnect from the fundamental value of company stock. This, of course, can be mitigated by investment in index tracking securities which apply an equal percentage weight in each stock, regardless of their market size. (Underrating the Magnificent Seven’s Concentration Risk | VanEck)

Although the article goes on to say it does not view US stocks as overvalued, it does discuss prudently diversifying into other geographies and sectors, whilst highlighting that other geographical markets also suffer from varying degrees of stock concentration.

The key takeaway is diversification and how this can be achieved in an efficient way. Gold and precious metal investments offer a means to diversify away from sector and national risks, as well as removing systemic risks associated with stock exchange-listed securities.

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Notes

The contents of this article are accurate at the time of publishing, are for general information purposes only and do not constitute investment, legal, tax or any other advice. Before making any investment or financial decision, you may wish to seek advice from your financial, legal, tax and/or accounting advisers.

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Sources: 

Underrating the Magnificent Seven’s Concentration Risk | VanEck 

Magnificent 7 Stocks: What You Need to Know (investopedia.com) 

Why Mega-Cap Tech Stocks’ Dominance Is a Risk (morganstanley.com) 

The Concentration Conundrum; What to do about market dominance (gspublishing.com)