S&P 500 Companies Shrink As An Overall Percentage Of The Index. The S&P 500 has basically turned into the S&P 5: the market cap weight of the top 5 stocks in the index is at a 40y high.
But that doesn’t necessarily mean that ”this is a bubble”.
The chart below shows that the market cap weight of the top 5 stocks in the S&P 500 has 0 (literally, zero!) predictive power over the total return the index is going to generate over the subsequent 12 months.
While there are clear extremes in certain corners of the market, large companies that benefit from structural tailwinds (e.g. technological progress, competitive advantages etc) can be hardly called ”bubbly” in many cases.
Equity risk premiums are far away from 2000 levels. Moreover, and not harvesting those has proven to be a very expensive exercise from a cost-opportunity perspective over the last few years.
The alternative was not only missing out on juicy returns. But also being penalized by negative risk-free real interest rates.
Markets can have severe draw downs from their peak. Of course! But pointing at a highly concentrated index as the driver bears zero statistical significance.
Simple narratives are easy to digest, but often misleading.