The ongoing rally in the US equity market is being led by its biggest players, with the top 10 US stocks now comprising 33% of the S&P 500's market cap, driving the index up by 30% over the past year.
However, this concentration has caused concern among investors, particularly about the substantial market concentration relative to historic levels.
Weighing in on this matter, Goldman Sachs strategists drew comparisons between today's largest stocks and those during significant historical periods: the late 1990s Tech Bubble and the early 1970s "Nifty Fifty" outperformance era.
From their analysis, they note that the current top stocks are trading at much lower valuations compared to the highest valuations observed during the Tech Bubble peak.
“Compared to the largest stocks in the early 1970s, today’s top 10 have similar valuations, but much higher profit margins and ROEs,” the strategists wrote.
“In contrast with record concentration, the valuations of the largest stocks remain well below previous highs,” they wrote.
Specifically, the top 10 stocks in the market are currently trading at a forward P/E ratio of 25x, significantly lower than peak levels observed in 2000, 2020, and mid-2023. Their 35% valuation premium over the S&P 500 is in the 70th percentile since 1985, below the 80% seen in mid-2023 and the 100% during 2000, the strategists highlighted.