What is Going on with Stock Market Concentration?

When major indexes are only chalking up smaller gains, but you have individual stocks booming, it creates an interesting dynamic in the market. 

Moderate losses in large-cap energy and financials are offset by outsized gains in consumer discretionary, such as Amazon and Tesla. Typically, no matter how large the individual stock is, it can’t keep the entire market up, right?

Well, things are changing. 

The Seesaw Theme

Nvidia is certainly an example of a stock that, with its gains alone, has driven the entire stock market, especially within the overall tech sector.

It's a fascinating seesaw theme that has led the market narrative this year. Typically, individual stocks do not have such power over the entire market, but here we are. It hasn’t been this bad, even during the post-COVID comeback when the Magnificent Seven took charge. At that time, around seven stocks controlled the swings of the market, but that's just it; there were seven stocks, not one. At least in the eyes of the market, thats a little better in terms of the diversity of assets (even though it's not diverse in all when seven technology stocks control the market).

Stock Comebacks

Returning to the present, on the days when AI isn’t leading the market, there are still select pockets of strength that are keeping the S&P 500 from more pronounced sell-offs and holding index volatility levels to low levels. 

This is great because we don’t want one company to continue to lead the market. 

Let's take Nvidia’s recent plunge under observation. This Monday, the chip maker closed down 13% from its record high. By surveying social media, especially X, you would think that the world was burning. With the way Nvidia has carried the market, it was interesting to see what would happen when the stock faltered. 

The ensuing market behaviors were definitely a surprise. The Dow Jones, which was only 3% YTD compared to the S&P 500 at 14%, staged a major comeback with energy stocks perking up and biotech showing signs of life. These are pockets of innovation that typically wouldn’t show gains if a major player in innovation fell the same day. 

It's not like Monday was the first time this has happened. The seesaw behavior is everywhere right now; even as major stocks are correcting, others are gaining. It's propping the market up and continuing its rise. The corrected stocks then see signs of life as other stocks fall, and they are the ones now propping the market. 

Even the next day on Tuesday, the S&P 500 managed a gain of 0.4% despite most of the market in the red. This doesn’t happen often, if ever, leading to a very “weird” market. 

Stock Market Purgatory

In a bull market, leading stocks eventually come to a halt as investors sell-off. This event should have already happened in theory, but currently, we are in some sort of market purgatory where sell-offs are happening every day, but other areas of the market are offsetting those losses with comebacks of their own. 

Take, for example, the Magnificent Seven. In the past 6 months, there are often times when, say, Microsoft and Alphabet are up, but Nivida and Apple might be down. The correlation between directional moves between the Magnificent Seven is just a mere 43%, which is very low compared to how it used to be.

The normal market cycles are not taking place, and that has put the overall market in a weird situation. We have sectors in the US markets, such as AI and tech, that are marching to the beat of their own drums, disrupting the rhythm of the markets. For now, this is great as it is leading to steady gains month-over-month; however, once the music stops, the market could see a major sell-off and start a bear market or even a recession.

The current market is almost like a toy with dying batteries. The build-up of risk due to the fact that a select few companies are controlling the global equities market could lead to the metaphorical “batteries” dying out and a free-fall plummet in the markets.