2024 Review: Market Concentration and Valuation

Last updated: March 19, 2024

In our 2024 Mid-Year letter, we discussed a group of mega-capitalization US stocks known as The Elite 8 -Apple, Microsoft, Google (Alphabet), Amazon, Nvidia, Facebook (Meta), Netflix and Tesla. As the chart below shows, the Elite 8 stocks gained 51.6% in 2024, the large weight of those holdings in the S&P 500 partially responsible for the S&P’s 24%+ annual gain. In fact, if we subtract the performance of the Elite 8 stocks from the S&P 500, performance drops by approximately 9 percentage points to a 2024 return of 15.2%.

Source: © Copyright 2025 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to
www.ndr.com/vendorinfo/

Additionally, while small cap, mid cap, and international stocks all underperformed the S&P 500, it is interesting to note that the S&P 500’s return without those 8 mega-cap stocks would have been more in line with small or mid-cap indices; growth stocks minus the Elite 8 would have performed more in line with value stocks; and US stocks minus the Elite 8 would have performed more in-line with developed international stocks. Relative performance differences between major indices and capitalization levels typically come down to more significant economic changes.

Instead, much of the difference in performance between portfolios, funds, managers and major indices in 2024 came down to which of them had one third of their capital invested in 8 expensive mega-capitalization growth stocks.

The professional investor class—those who manage mutual funds or institutional portfolios—take benchmark focus to a level of detail that would surprise those outside the profession. A mutual fund manager with an S&P benchmark knows the weight of every major stock in the S&P 500 to the percentage point and must focus intently on stocks with the heaviest weightings in any S&P economic sector, or in the benchmark itself, because those weights drive the return that the manager’s performance competes with. In the case of an Elite-8-member-stock like Nvidia, whose weight is 6.9% of the S&P 500 and whose performance chart looks like Mt. Everest viewed from base camp, the biggest risk for the mutual fund manager is failing to own a position in NVDA that is at least the same weight as that of the benchmark. At a cumulative 33% weight in the S&P 500, the Elite 8 group as a whole garners even more attention.

S&P 500 benchmarked portfolio managers have been faced with a stark choice—hold their noses and simply own these names or some facsimile of them, accepting the high valuations and concentration issues inherent in investing one third of their portfolio in 8 stocks, or risk underperformance if the trend continues. At this point in the cycle, after blistering 2-year performance led by the Elite 8, the nonconformist valuation sensitive growth managers who diverged from the pack are licking their wounds while many of the leading S&P benchmarked Fund Managers survived because they made the trend their friend and simply owned some benchmark weighted approximation of the Elite 8.

As investors, we should carefully examine the reason for manager, index and allocation underperformance at times like these and reconsider allocations where tough results came at the cost of this very specific challenge. When extremes in market concentration inevitably normalize, the managers, allocations and indices that were not swept up in the performance of a few large cap stocks will be likely outperformers.

Source: @Charlie Bilello, Creative Planning, YCharts

Valuation

The S&P 500 ended the year at 25x trailing earnings, compared to an average post-1980 valuation of approximately 19x. As you can see from the accompanying chart, S&P 500 index valuation has only been this high at a few points over the past 50 years, including moments of extremity such as 2020/2021, 2009, and for several years centered around 2000. While several of these moments of high valuation represented negative turning points, others did not—2000 represented the time when a bubble was about to pop, but 2009 represented the beginning of a multi-year recovery.

Another way of highlighting the high level of valuation is the dividend yield for the S&P 500. Despite absolute dividend levels being at a long-term high, the price paid for the underlying stocks affects the dividend yield for those stocks, which is near a multi-year low.

Does this mean the sky is about to fall? It does not. As you can see from the chart below, returns for the year following valuation at this level are all over the map, ranging from significant positives to meaningful negatives, and there is no discernible one-year trend. The data is less supportive, however, for the 10-year period following such valuation levels, over which time significant returns from large cap stocks have historically been hard to come by. Warren Buffett sometimes says, ‘Over the short-term the market is a voting mechanism, but over the long-term it is a weighing mechanism’.

Source: (All Charts) IBES, LSEG Datastream, S&P Global, J.P. Morgan Asset Management. •Dots represent monthly data points since 1988, which is earliest available. Forward P/E ratio is price to 12-month forward earnings, calculated using IBES earnings estimates. Past performance is not a reliable indicator of current and future results. Guide to the Markets – Europe. Data as of 31 December 2024.

Summary

We live in interesting times, but in 2024 that timeworn challenge failed to diminish a trend of historic gains. As we consider the year in perspective, a number of data points emerge that bear scrutiny, to include an all-time high in concentration percentage among the largest stocks in the S&P 500, valuations that are high by historical standards, a President that is willing to diverge from the economic structure of recent decades, stubborn inflation that can’t quite fall to the 2% Federal Reserve target, and a big change in the level of interest rates relative to the lows of a few years ago. Even the multi-year performance of the S&P 500, while positive for investors over the last two years, could be added to that list.

TRB Trust & Wealth Management manages portfolios for a wide range of clients, with approaches customized for different assets, structures, goals, and investment horizons. Our preferred perspective is always long-term with a focus on growth and compounding assets, and many of our conversations with clients are based around that long-term outlook. The very best thing for clients over extended time periods is to hold through the day-to-day, or even the year-to-year noise, adding to their investments when fear and volatility create opportunity, and reallocating to capitalize on market strength. Our long-term investment focus does not, however, prevent us from making tactical changes in portfolios, and the focus at this juncture should be adjustments toward areas of the market that have been left behind by some of the challenges discussed in this note.

This includes stocks, active managers, and indices with value orientations as well as some blend of value with small and mid-sized capitalization focus. Additionally, while capitalization-weighted large-cap indices have significant concentration and valuation issues, equal-weighted indices allow similar exposure to large stocks with less of those concerns. International and emerging market indices also fit into this category, particularly after years of underperformance as well as more attractive valuations than we see in the US, though investors must be prepared to weather volatility in any geography that becomes caught up in abrupt changes to US trade policy.

Economies and markets never lack concerns and catalysts, and it is our job to incorporate risks and opportunities into long-term portfolio construction. We have a strong and growing team across the state, and it is a good idea to check in with your advisor to discuss your perspective and confirm that goals and portfolio allocations are appropriate relative to the potential for market volatility.

This article is an excerpt of a larger work by Chief Investment Officer Trey Willerson. In his 2024 Year End Review, Willerson provides an in-depth analysis of the key economic and market trends that shaped the past year, offering insights into what may lie ahead for investors. Read the full article here.

Helpful Links

Investment and insurance products: NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE

TRB Wealth Management, LLC is a Registered Investment Advisor with the Securities and Exchange Commission

Form CRS | Form ADV | Advisor Info

TRB Wealth Management, LLC does business in the name of TRB Trust and Wealth Management. Trust and Family Office services offered exclusively through Texas Regional Bank. The trust department of Texas Regional Bank has engaged TRB Wealth Management, LLC to provide investment advice to Texas Regional Bank for trust department accounts.