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.
This content is for informational and educational purposes only and should not be construed as personalized investment, tax, or legal advice. All opinions expressed are as of the date of publication and are subject to change without notice. Any historical, hypothetical, or backtested performance data referenced herein has inherent limitations: it does not represent actual client accounts or actual trading, is not reduced by advisory fees or other expenses that would apply to a real account unless stated otherwise, assumes reinvestment of dividends and other earnings, and was calculated with the benefit of hindsight. Actual results will vary, and past performance does not guarantee future results. The value of investments will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. References to specific securities, funds, or investment strategies are for illustrative and educational purposes only and do not constitute a recommendation to buy or sell any security. Not all recommendations will be profitable. Any testimonials or client comments referenced are not representative of the experience of all clients, are not indicative of future performance, and no compensation was provided in exchange for such statements. Information has been obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. Nothing herein is a solicitation or offer to buy or sell any security. Meredith Wealth Planning, LLC is an SEC-registered investment adviser; registration does not imply a certain level of skill or training. For a full description of our services, fees, and any conflicts of interest, please review our Form ADV Part 2A and Form CRS at meredithwealth.com/disclosures.
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