In the most recent quarter of 2023, four of the big tech giants: Alphabet (Google), Meta, Microsoft and Amazon mentioned the term “AI” some 186 times. That is 36 times more often than just one year prior.
To take a line from one of my favorite comedies “Spaceballs”, the market appears to have gone plaid again. For those who have not seen this cinematic classic, I'll elaborate: Some areas of the market seem to have gone beyond ludicrous speed this year and into plaid. AI has sparked another tech frenzy it seems as a handful of stocks have seen their prices rise dramatically this year.
Alright .... all jokes aside, if there is an area of the stock market that has gone past ludicrous speed into plaid, it has to be large growth; and by large growth I mean Mega-Tech:
The chart above is using the Herfindahl-Hirschman Index. A lower score is an indicator of more concertation; in other words, the current score of 63 indicates a much more concentrated market than the average of 130 since 1990. Starting around 2016, there has been a sustained downward shift in the curve showing a growing concentration within the US stock market.
Investors should be cautious about buying the best and brightest stocks of today. What they're really buying is yesterday's returns which moved these companies into the Top 10. Research from Dimensional Fund Advisors illustrates how the 10 largest stocks performed leading up to and after inclusion into the Top 10 list. The orange bars above show the lackluster performance investors have historically experienced.
The largest stocks in the US market still have positive expected returns going forward; however, investors may want to look at the historical evidence and intelligently allocate their stock exposure among other areas of the market offering high profits but at a reasonable price.
Disclosures: This article is for informational purposes only and should not be considered a recommendation. Information contained in this article is obtained from third party resources that Meredith Wealth Planning deems to be reliable. Consult with a financial advisor before implementing any strategies. Past performance does not equal future results. Meredith Wealth Planning does not guarantee any minimum level of investment performance or the success of any index portfolio, index, mutual fund or investment strategy.
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