US stock market’s concentration hits all-time high. Is that a problem for crypto?

The US Stock Market's Concentrated Basket

The US stock market has taken a concerning turn, with an unprecedented concentration of value in a select few stocks. Currently, merely 26 stocks constitute half of the S&P 500 index's total worth.

This anomaly breaks historical norms. Records show that the previous low was 36 stocks in late 2023. The current situation marks the lowest concentration since 1980 and potentially since the index's inception in 1957.

Tech's Dominance

The tech sector has emerged as the driving force behind this concentration. Mega-cap tech giants, such as Nvidia and Microsoft, hold significant sway. The top 10 stocks alone now account for 37.3% of the S&P 500, setting a new modern-day record.

This concentration has cast doubt on the value of diversification, a cornerstone of investment strategies.

Nvidia's Outsized Influence

Nvidia reigns as the S&P 500's top performer. Its success, largely driven by its leadership in AI, has become a defining factor for many portfolios.

"It's basically Nvidia in disguise," observes Torsten Sløk, Apollo's chief economist, highlighting the "diversification illusion" created by this concentration.

Underlying Causes

Two key factors have contributed to this concentration: the extraordinary profit growth of mega-cap companies in recent years and their subsequent valuations.

The concern lies not only in the concentration itself but also in the underlying forces driving it: the continued flow of profits to the same companies and their ever-increasing market valuations.

Crypto's Potential Divergence

In contrast to the stock market's concentration, the cryptocurrency market appears to be distancing itself from its former correlation with tech stocks.

Bitcoin, the largest cryptocurrency, has gained over 10% since December, while altcoins like Ethereum and Dogecoin have experienced even greater increases.

Analysts remain cautious, recognizing crypto's volatility and its historical association with high-leverage tech stocks. However, factors such as Trump's return to the White House and economic conditions favorable to riskier assets have contributed to optimism within the crypto community.