Mega-Cap Stocks Continue to Dominate - But Why?
Mega-cap stocks continue to dominate the market in 2023. The question is, why? After all, many other great companies have arguably much better valuations and fundamentals.
Yet, those companies continue to lag the market’s overall returns as the bifurcation between the Mega-cap companies and everything else widens. The chat below clarifies the problem, which compares the market-capitalization weighted index to the equal-weight.
The bifurcation between the top 10 companies, as measured by market capitalization, and the other 490 stocks in the index has created an illusion of market bullishness. As we discussed just recently in “Investing In 2024:”
“The surge in the most hated sectors last year has been the main driver of this year’s broad market performance. If we strip out the performance of those three sectors, the market would be near flat on a year-to-date basis.”
Despite the extremely crowded trade into the three sectors comprised of those ten stocks, we continue to see professional investors crowd into those shares at a record clip.
The question is, why are professional managers seemingly chasing these stocks with reckless abandon?
The answer is more simplistic than you may think.
For investment managers, generating performance is necessary to limit “career risk.” If a manager underperforms their relative benchmark index for very long, they most likely won’t have a “career” in the investment management business.
Currently, there are two drivers for the mega-capitalization stock chase. First, these stocks are highly liquid, and managers can quickly move money into and out without significant price movements.
The second is the passive indexing effect.
As investors change their investing habits from buying individual
Read more on investing.com
