With the recent AI-fueled rally, there are now six companies in the US with a $1 trillion-plus valuation. To put that into perspective, one billion seconds is roughly 31.7 years while one trillion seconds is just over 31,700 years. Referring to these companies as astronomical would almost be an understatement. Not surprisingly, these companies are largely tech-based:

• Microsoft ($3.1 trillion)
• Apple ($2.7 trillion)
• Nvidia ($2.3 trillion)
• Amazon ($1.8 trillion)
• Alphabet ($1.7 trillion)
• Meta ($1.3 trillion)

As the share prices of these tech behemoths soared in 2023, they began to eat more and more market share. These six companies alone make up 27.5% of the S&P 500. Expanding it to the top 10 holdings, we’re now talking about 33.2% of the Index:

Going back to just 2015, the top 10 holdings in the S&P 500 only made up 17.8% of the weight. Needless to say, the most widely followed benchmark in the world has become much more concentrated in recent years.

What does this mean for markets going forward? What if these top companies falter...would it trigger a market meltdown with so much weight in just a handful of stocks?

It’s important to understand how market concentration has fluctuated throughout history. From 1950 - 1970, it was common for the top 10 holdings to make up more than a third of the S&P’s total market cap. The top 10 accounted for over 40% of the S&P 500 in the early 70s before starting a trend lower. Concentration remained more muted in the 80s and 90s, averaging below 20%, but spiked higher again leading up to the dot-com bubble.

Over this period of time, the S&P 500 has still averaged a solid 11.28% average annual return amid these market concentration shifts. It’s normal for different companies to ebb and flow into and out of the top 10. The majority of today’s top holdings didn’t even exist back in 1950, but the market continued to grow and expand. The largest companies tend to represent the trends and preferences of the times.

Using the late 1990s as a proxy for today, large tech-focused companies were dominating the markets, with the top 10 holdings making up a quarter of the S&P 500. This was great when markets were firing on all cylinders. Just look at the returns in the last half of the decade.

Not a bad five-year stretch there. The data above also shows that strong trends with bubble-like characteristics can last for much longer than most investors think. However, the good times didn’t last forever. When the dot-com bubble popped, the S&P 500 saw three consecutive losing years, with large-cap tech companies leading the way lower.

This doesn’t necessarily mean we’ll see the exact same scenario play out in the 2020s. There are plenty of differences, for the better, when comparing today's environment to the dot-com era. For example, the tech companies in question today are more profitable and cash-heavy than the companies of the early 2000s.

Nonetheless, market trends can change direction quickly, without much notice. This is why maintaining a diversified portfolio can be so important. It can be tempting to chase trends as they happen in real-time, but patience can pay off over the long run. Just look at how some of these non-tech market categories held up during the dot-com bubble.

While large-cap tech companies were being pummeled, a diversified portfolio would have held up much better. This is even true in more recent history. During the bear market of 2022, we saw sharp losses in these mega-cap companies - Alphabet (38.67%), Amazon (49.50%), Apple (26.31%), Meta (64.22%), Microsoft (28.02%), and Nvidia (50.26%). Compared to the 18.11% loss for the S&P 500, each of these stocks was far worse than the Index. As these big name tech companies faltered, other sectors stepped up to help offset the losses.

Diversification isn’t about maximizing returns in any given year. It’s more about risk management and regret minimization. Market trends tend to work like a pendulum, swinging from one side to the other as investors try to find the appropriate equilibrium. There’s no way to know exactly what comes next, but holding various asset classes can help insulate against concentration risk, while still providing some exposure to whatever’s working at the time.

Remember, if your investments feel too exciting then you might be gambling, not investing. Successful investing should be boring, with different asset classes working together to achieve an appropriate balance over a long-term time horizon.

The information presented is not investment advice - it is for educational purposes only and is not an offer or solicitation for the sale or purchase of any securities or investment advisory services. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser when making investment decisions.

Markets moved broadly higher in February as AI-focused companies continued to fuel the rally.

A slew of robust earnings reports, led by some large tech companies, supported investor sentiment throughout the month. With 73% of S&P 500 companies having reported a positive earnings surprise, the strong data helped offset some uncertainty around the timing of a potential Fed rate cut.

Unlike January, market participation was more widespread in February, with larger and smaller companies climbing higher. The small-cap Russell 2000 led the way, gaining 5.52% after faltering to start the year. Large-cap US indices weren’t far behind, with the Nasdaq 100, S&P 500 and Dow Jones Industrial Average gaining 5.29%, 5.10%, and 2.22% respectively.

Overseas, international markets trailed the US, though still ended the month with respectable gains. Developed international stocks rose 2.74% while emerging markets increased 3.48%. Despite the more modest returns, there was still a noteworthy event to celebrate - Japan’s Nikkei 225 Index reached a new record high for the first time since 1989.

There was no official meeting scheduled in February, but Fed members pushed back against a near-term start to interest rate cuts during various press conferences. The statements caused investors to readjust expectations for an initial rate cut, with June now sitting as the front runner for a potential first move. With rate cut expectations being pushed further into the year, the 10-year treasury yield rose from 3.99% to 4.25%, causing aggregate US bonds to fall 1.41%. Despite the ongoing headwinds, bond yields remain relatively favorable compared to just a couple of years ago.

While markets have continued to trend higher, it raises the question of whether the recent rally is overextended. With strong earnings supporting the fundamentals, and rate cuts still on the horizon, data suggests there could be further upside. However, it’s not unreasonable to expect some volatility along the way. Markets don’t move in a straight line. This is why it’s important to have a defined investment strategy and plan, to provide guidance throughout the inevitable uncertainties along the way. Our investment team is currently looking for ways to protect the gains that we have seen since 2023 and position portfolios to take advantage of any future volatility.

The information presented is not investment advice - it is for educational purposes only and is not an offer or solicitation for the sale or purchase of any securities or investment advisory services. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser when making investment decisions.

 

Market Health Indicator
The Market Health Indicator (MHI) measures market health on a scale of 0 - 100, analyzing various market segments such as economics, technicals, and volatility. Higher scores indicate healthier market conditions.

October was filled with more tricks than treats as markets continued to slump.

Rising interest rates, combined with heightened geopolitical uncertainties, weighed on market sentiment. While there was no Fed meeting during the month, investors priced in higher rates for longer. Some stronger-than-expected economic data supported this viewpoint as the labor market added more jobs than forecast, consumer spending remained relatively strong, and GDP showed the US economy expanded more than predicted.

Small-cap stocks were the laggards again, realizing further downside pressure as the Russell 2000 fell 6.88%. The larger US indices held up better but still finished the month negative with losses of 1.36%, 2.20%, and 2.78% for the Dow Jones Industrial Average, S&P 500, and Nasdaq respectively. It was the third consecutive negative month for broad equity markets, marking the longest monthly losing streak since early 2020.

Stocks overseas also slipped lower, lagging their US counterparts as developed international stocks dropped 3.39% and emerging markets lost 3.24%. The rising tensions in Israel, in addition to the ongoing Russia - Ukraine conflict, further dampened global risk appetite.

There was no Fed meeting in October, but interest rates continued to climb on the expectation of rates being held higher for longer. The 10-year Treasury yield rose from 4.59% to 4.88%, resulting in a loss of 1.37% for the aggregate US bond market. This marks the sixth consecutive monthly decline for traditional bonds as rising rates have remained a headwind. However, the silver lining is once they level off higher rates will eventually be a positive for bonds, providing higher income payments for the future. Despite the recent downward pressure, this is already becoming apparent as aggregate US bonds are down only 1.77% YTD, compared to a loss of 13.02% in 2022.

While each year is unique, the last couple of months of the year tend to be seasonally strong, and investors are hoping this holds true as we enter the holiday season. Market volatility and uncertainty can be understandably disconcerting, but having an appropriate plan in place can help block out the short-term noise and keep focus on reaching the more important longer-term goals.

Story 1
What do tires, stars, and hotels have in common? The Michelin Man.

The French tire company started the Michelin Guide in 1900 to help travelers plan their long-distance trips (so it could sell more tires).

After 123 years of recommending restaurants, with its first stars being awarded in 1926, the Michelin Guide is jumping into the hotel space.

Similar to its famous star rating system, Michelin will grant “keys” to hotels from around the world that meet its high standards, relying on its own judges who will anonymously check into rooms.

Judges will consider five factors when it comes to rating the hotels - destination locations, architecture and interior design, service, unique character, and value.

The move comes as more companies look to grab a bigger piece of the growing travel and hospitality industry amid strong demand.

Story 2
It’s being dubbed Pharmageddon, not to be confused with the 1998 film starring Bruce Willis.

Pharmacists at multiple chains across the US, including CVS and Walgreens, have organized walkouts as recent protests have gained momentum.

However, unlike the auto industry and writers guild strikes, pharmacy workers aren’t demanding bigger paychecks.

Instead, the pharmacists are asking their employers to hire more staff and change policies that are causing them to rush filling prescriptions.

Nearly three-quarters of pharmacists surveyed said they didn’t have enough time to safely do their jobs, which was exacerbated with the pandemic as new vaccines became available.

Major pharmacy chains have plans to close 1.5k stores in an effort to cut costs, which could accelerate the adoption of mail-order services.

The information presented is not investment advice - it is for educational purposes only and is not an offer or solicitation for the sale or purchase of any securities or investment advisory services. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser when making investment decisions.

Market Health Indicator
The Market Health Indicator (MHI) measures market health on a scale of 0 - 100, analyzing various market segments such as economics, technicals, and volatility. Higher scores indicate healthier market conditions.

It was another tough month for markets as the late-summer slump continued through September.

While the Fed held interest rates steady as expected, it left the door open for one more rate hike before the end of the year. Combined with newly released projections indicating fewer rate cuts than previously anticipated next year, the Fed appears to be leaning toward a higher-for-longer approach to interest rates. Fed Chair Jerome Powell acknowledged the progress that’s been made in the fight against inflation but wants to see more evidence before more permanently pausing rates.

Small-cap stocks again experienced the most downside pressure with the Russell 2000 falling 6.03%. Value stocks held up a bit better than growth stocks for the month, but all three of the major US indices slid with losses of 5.81%, 4.87%, and 3.49% for the Nasdaq, S&P 500, and Dow Jones Industrial Average respectively.

International stocks were also negative in September, but held up slightly better than their US counterparts as developed international stocks lost 3.78% and emerging markets fell 2.47%. More exposure to energy companies overseas helped international stocks as a whole, as energy was the only positive sector for the month riding oil prices higher

Despite no change for the Fed, broad interest rates spiked higher as markets priced in the possibility of rates remaining elevated for longer. The 10-year Treasury yield jumped from 4.09% to 4.59%, causing aggregate US bonds to lose 2.54%. This was the fifth consecutive monthly decline for traditional bonds as interest rates have remained a headwind.

As we move into the final quarter of the year, markets continue to send mixed messages. The tech-heavy Nasdaq has been pulling broad stock markets higher YTD thanks to the artificial intelligence buzz, but the simultaneous drop in both stocks and bonds in Q3 is reminiscent of what happened in 2022. When markets are volatile and uncertain, it’s important to tune out the noise and keep focused on your long-term plan. Market pullbacks can be unnerving when they occur, but over the long run they tend to turn into small speed bumps on the way to achieving your overarching goals.

That’s a lot of cheese…

Disney announced plans to spend $60 billion on its theme park and cruise businesses over the next decade, nearly doubling its investments in those avenues.

Parks have been a reliable source of profit for the company, helping offset losses in its streaming division which is expected to remain a loss leader until late next year.

Despite a drop-off in attendance, guests are reported to be spending 42% more at parks compared to 2019 as customers have been upgrading tickets and buying more merchandise.

In addition to increasing its cruise line capacity, the company is looking to incorporate the intellectual property from more of its newer films into the theme parks.

Across its six park locations, Disney has over 1,000 acres of land available for development.

 

She's Cheer Captain...

And I'm on the bleachers (or luxury box suite).

Taylor Swift’s presence has spilled over from Hollywood to the NFL. The singer was spotted in the stands of the Kansas City Chiefs - Chicago Bears game amid rumors of a romance with Chiefs’ tight end Travis Kelce.

The game drew 24.3 million viewers making it the most watched game of the week, thanks in large part to a 63% jump in female viewers between the age of 18-49. Additionally, Travis Kelce jersey sales shot up 400% in the 24 hours immediately following the game.

It’s not just the NFL that’s benefitting from her loyal fans. Estimates project Swift’s Eras Tour will boost the US economy by $5 billion when all is said and done.

To put that into perspective, if Taylor Swift were an economy, she’d be bigger than 30 countries.

The information presented is not investment advice - it is for educational purposes only and is not an offer or solicitation for the sale or purchase of any securities or investment advisory services. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser when making investment decisions.