The world's top ten stocks by market value have more influence on capital markets than ever before, and that may be a bad thing, says Ned Davis Research.
The top 10 names by market capitalization in the All Country World Index (ACWI) now account for nearly a fifth, or 19%, of the benchmark's value, a record high in terms of concentration, according to a report Monday from the Wall Street firm.
Not only are they all US companies, but the top seven - Alphabet, Apple, Amazon, Meta Platforms, Microsoft, Nvidia and Tesla - are the usual suspects, which have seen huge rallies this year thanks to the AI craze. Apple is up 36% this year, while Alphabet is up 55%.
But if history is any indication, this could mean troubled waters for investors. Ned Davis found that a bear market soon followed strong concentrations in 2000 and 2021. However, there was an exception in 2020, when a handful of stocks expanded to support the bull market.
"Will the current concentration lead to an outcome reminiscent of 2020, or is it a precursor to a bear market as it was in 2000 and 2021?" Tim Hayes, the firm's chief global investment strategist, wrote in a research note.
Investors will have to watch closely to see how stocks deal with seasonal issues in September to answer that question. If the current growth trend can be sustained, then stocks could repeat 2020 and continue to grow. Ned Davis tracks the aggregate strength of key 50-day and 200-day indicators.
However, the firm says stocks could fall into a bear market if this year's rally doesn't spread to more sectors.
"While the equity-weighted ACWI index is still well above its rising equilibrium, the equal-weighted index is just above it. With the equal-weighted index underperforming and the Rally Watch aggregate failing to bounce off the bottom, the market would be increasingly exposed to a mega-cap decline," Hayes wrote.
"However, if we see a year-end advance with rising participation and receding concentration, then we will have further confirmation that the bull market is well contained and sustainable," he added.
The stock market has entered its worst ten-day period ever this year
According to Bank of America, the stock market on Monday entered its worst-ever seasonal stretch of days this year.
"September 18 marks the start of the last 10 days of September, the worst 10-day period of the year for the [S&P 500 Index], with the index up 40% for an average return of -1.11%," Stephen Suttmeier, Bank of America's technical research strategist, wrote Tuesday.
So far this week, the S&P 500 index is true to form, down about 0.6%.
A TOUGH STRETCH FOR THE S&P 500
Goldman Sachs noted this week that the period from now through October is typically volatile, as company managements are pressed to provide full-year updates as the end of the third quarter approaches. These early warnings can often be negative.
In addition to the typical seasonal tendencies, investors will get a key Federal Reserve update this Wednesday, with the central bank torn between still-high inflation and a slowing economy. The economy is also being impacted by a series of worker shutdowns, higher oil prices and a looming government shutdown that has investors worried.
The S&P 500 index was already in the red in the first part of September, and Suttmeier noted that this doesn't make this stretch a buying opportunity.
"When the first 10 days or month is below average, the last 10 days of the month can be challenging as well, with the SPX up 41% for an average return of -1.66%," he said in a note.
Despite the fact that there could be a weak period, the Bank of America technical analyst is still bullish overall, unless a potential pullback breaks key support levels he is watching. For example, today's market benchmark around 4,425 is still well above its 200-week moving average of 3,914, according to Suttmeier, so it is still in a "secular bullish" trend.