Scientific Beta: Is now the time to diversify across stocks?
Scientific Beta today released new research indicating that the current extreme concentration in US equity markets likely signals an approaching turning point for investors.
The study 'Is now the time to diversify across stocks?' provides evidence that extreme market concentration typically precedes significant outperformance by diversified strategies. US market concentration has reached levels not seen since the 1960s, with the top ten stocks now accounting for a third of the market index. Scientific Beta's analysis shows such periods of extreme concentration have consistently reversed over time.
Key findings:
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Market concentration exhibits long-term cyclical behaviour rather than permanent shifts.
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Diversified equity strategies have historically outperformed mega-caps by an average of 4% annually following past concentration peaks.
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Valuations of today’s largest stocks are higher than 90% of historical observations since the 1970s when assessed relative to more diversified equity portfolios.
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There is no historical precedent of diversified portfolios underperforming over 10-year periods following similar valuation extremes in mega-caps.
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"New era" narratives used to justify today’s mega-cap dominance are flawed; historical evidence shows that even transformative companies eventually face disruption from competition and profit mean reversion.
The study draws parallels between today’s market leaders and previous generations of dominant firms, noting that in the 1970s, “magnificent” stocks included Kodak and Xerox—companies that ultimately lost their leadership positions.
'When market concentration reaches levels like we’re seeing today, history strongly favours the disciplined investor,' said Daniel Aguet, Deputy CEO and Index Director at Scientific Beta. 'Those maintaining diversified portfolios may soon find their patience rewarded, while investors chasing yesterday's winners risk arriving just as the cycle turns.'
