The U.S. stock market has been experiencing significant gains this year, building on the momentum from 2023, when the S&P 500 saw an impressive increase of over 24%. However, the nature of the current bull market is characterized by a high level of market concentration. This trend was highlighted by Cathie Wood, founder of Ark Invest, during the firm’s monthly market update webinar on Wednesday.
Wood pointed out the extreme concentration in the market, as illustrated by a chart comparing the market capitalization of the largest stock to that of the 75th percentile stock. This chart, created by Goldman Sachs and shared by the Kobeissi Letter, reveals that the market cap of the largest stock is 750 times greater than that of a stock in the 75th percentile—meaning a stock performing better than 75% of the market. This level of concentration surpasses that seen during the Great Depression in 1932.
In the webinar, Wood discussed how the market concentration has reached a level even more extreme than during the Great Depression. Back then, the unemployment rate exceeded 25%, and global economic activity plummeted due to the Smoot-Hawley Tariff Act, leading to uncertainty about which companies would survive. This uncertainty caused investors to crowd into a few large companies, dramatically increasing market concentration. Wood emphasized that the current market has now exceeded that peak concentration level.
Despite this extreme concentration, Wood sees potential positive outcomes. She drew parallels between the present day and the Great Depression, noting that both periods were marked by significant disruptive innovation. During the Great Depression, innovations like the telephone, electricity, and the internal combustion engine were at the forefront. Today, artificial intelligence (AI) is the primary disruptive innovation driving the market. Wood suggested that while the market currently behaves as if only a few companies benefit from AI, the productivity gains from AI could eventually be widespread, benefiting many companies across various sectors.
Wood also highlighted a historical precedent: following the peak of market concentration during the Great Depression, the stock market saw a substantial increase of 62% over the next three to four years. This growth disproportionately favored smaller and mid-cap stocks rather than the mega-cap “cash fortresses.” This historical context suggests that the current market could see a similar broadening of gains, benefiting a wider range of companies.
The performance of the SPDR S&P 500 ETF Trust (NYSE:SPY), which tracks the S&P 500 Index, reflects this market dynamic. The ETF ended Thursday’s session with a modest gain of 0.16% at $546.37 and has gained about 16% this year. In contrast, the iShares Russell 2000 ETF (NYSE:IWM), which represents smaller companies, has seen a more modest increase of 1.2% this year.
Wood’s insights suggest that while the market is currently dominated by a few large companies, there is potential for a broader rally that could benefit smaller and mid-cap stocks. Investors might consider this historical perspective and the potential for disruptive innovations like AI to drive widespread economic benefits in their investment strategies.