Concentration within the S&P 500 Index is historically high, which suggests that returns, based on market cap have largely been driven by only the very largest stocks.1
Growth valuations are elevated, while value-oriented sectors are trading at a discount and/or below their historical averages.2
Recently, the top-performing sectors have become the laggards — early evidence of a broadening market.
Yes, growth has significantly outperformed value for more than a decade. After a period of value outperformance from September 2020 through 2022, growth returned back in favor through 2023 and much of 2024.3 But that doesn’t mean investors should only be invested in growth. In fact, some may be over-concentrated in it without realizing it. That makes them vulnerable to a leadership change where value may significantly outperform. Style leadership has moved in cycles, and value and growth have experienced distinct periods where one outperformed the other. That’s why investors should be prepared for reversals.
Concentration within the Russell 1000 Growth Index and S&P 500 Index is at historically high levels. That suggests that returns, based on market cap, have largely been driven by select stocks. For the S&P 500, it was mainly the top 10 largest holdings (see chart below). All are involved in developing artificial intelligence (AI). Money has flowed into these stocks at record levels, leading to historically high stock prices and driving higher market capitalization. The top 10 stocks were 35.8% of the S&P 500 in June 2024 compared to 21.6% in June 2019. (See chart below.) Six names have been in the top 10 for the last five years.
| S&P 500 top-10 holdings June 2024 | 35.8% | S&P 500 top-10 holdings June 2019 | 21.6% |
|---|---|---|---|
Microsoft Corp. (MSFT) |
7.25% |
Microsoft Corp. (MSFT) |
4.19% |
NVIDIA Corp. (NVDA) |
6.63% |
Apple Inc (AAPL) |
3.74% |
Apple Inc (AAPL) |
6.62% |
Amazon.com Inc. (AMZN) |
3.10% |
Amazon.com Inc. (AMZN) |
3.86% |
Meta Platforms Inc. (META) |
1.87% |
Meta Platforms Inc. (META) |
2.41% |
Berkshire Hathaway Inc. (BRK.B) |
1.60% |
Alphabet Inc. (GOOGL) |
2.33% |
JPMorgan Chase & Co. (JPM) |
1.51% |
Alphabet Inc. (GOOG) |
1.96% |
Alphabet Inc. (GOOGL) |
1.50% |
Berkshire Hathaway Inc. (BRK.B) |
1.61% |
Alphabet Inc. (GOOG) |
1.46% |
Eli Lily and Co. (LLY) |
1.57% |
Johnson & Johnson (JNJ) |
1.39% |
Broadcom (AVGO) |
1.53% |
Exxon Mobil Corp. |
1.26% |
Source: Bloomberg L.P. as of September 30, 2024.
Growth valuations are currently elevated, which may indicate that expectations are high and/or that prices have disconnected from fundamentals. Value-oriented sectors are predominantly trading at a discount to the broader market and/or below their historical averages. High expectations, coupled with stretched valuations versus historical averages, can set the stage, in our view, for a material downturn in some of these stocks if expectations are not met.
Source: Bloomberg L.P., quarterly ratio data from 3/31/1995‒9/30/2024, beginning Q1 1995 due to data availability. The price-to-earnings (P/E) ratio measures a stock’s valuation by dividing its share price by its earnings per share. The price-to-book (P/B) ratio is calculated by dividing the market price of a stock by its book value per share. An investment cannot be made directly into an index. Past performance does not guarantee future returns.
Source: Bloomberg L.P., quarterly ratio data from 3/31/1995‒9/30/2024, beginning Q1 1995 due to data availability. The price-to-earnings (P/E) ratio measures a stock’s valuation by dividing its share price by its earnings per share. The price-to-book (P/B) ratio is calculated by dividing the market price of a stock by its book value per share. An investment cannot be made directly into an index. Past performance does not guarantee future returns.
Currently, value is more diversified across sectors than growth. Nearly 76% of the Russell 1000 Growth Index is concentrated in just three sectors, with the information technology sector alone having a 49% weight.4 Of the 11 stock market sectors, eight have a larger weight in the Russell 1000 Value Index compared to the Russell 1000 Growth.4
More recently, the market leaders have become the laggards, and we’ve seen a broadening of the market. It’s a symptom of the largest AI-driven stocks being priced to “perfection.” That means even if these companies beat their earnings or revenue estimates, it may not be “good enough,” as we’ve seen recently in some of these stocks. For example: Mag 7 revenue is growing 15% year-over-year, but capital expenditures have also increased and been a concern to investors, causing weakness in the stock prices. The other 493 stocks in the S&P 500 have 2.9% revenue growth.5 Weak and slowing revenue growth in the broader market explains weaker cyclical employment, creating weaker income and ending in lower spending.
The winning sectors for much of 2024 have become the biggest laggards in performance over the past three months (July, August and September). (See chart below.)
The 12-month period winners were information technology (IT) and communication services. However, for the three-month period, they were among the worst-performing sectors.
GICS Sector |
Energy |
Info technology |
Comm. services | Health |
Consumer |
Consumer |
Materials |
Financials | Industrials |
Real |
Utilities |
|---|---|---|---|---|---|---|---|---|---|---|---|
| 3-month total return | -2.32 |
1.61 |
1.68 |
6.07 |
7.80 |
8.96 |
9.70 |
10.66 |
11.55 |
17.17 |
19.37 |
| 12-month total return | 0.85 |
52.68 |
42.91 |
21.69 |
28.06 |
25.32 |
25.20 |
39.01 |
35.89 |
35.83 |
41.82 |
Source: Morningstar as of Sep. 30, 2024. Past performance does not guarantee future returns.
Although investors haven’t been attracted to growth based on its recent performance, to potentially mitigate risk you may consider diversifying your stock exposure. This is a good time for investors to review their portfolio to determine if your equity exposure is still meeting your investing goals. Investing in both growth and value can make sense.
Source: Bloomberg L.P. as of September 30, 2024.. The S&P 500 top 10 holdings as of June 2024 were 35.8% vs. 21.6% as of June 2019.
Source: Bloomberg L.P. as of September 30, 2024. Growth valuations are currently elevated relative to history, which may indicate that expectations are high or that prices have disconnected from fundamentals as measured by Price to Earnings (P/E) Ratio and Price to book (P/B) ratios for the Russell 1000 Growth Index (Forward P/E is currently 29x vs. its average since 1995 at 22x and P/B ratio is currently 13x vs. its average since 1995 of 6x).
Source: Bloomberg L.P.; based on daily return for the Russell 1000 Value Total Return Index and Russell 1000 Growth Index. For the period of January 1, 2018 to September 30, 2024, the Russell Growth 1000 index had an annualized return of 17.38% outperforming the Russell 1000 Value index which had an annualized return 8.54% for the same time period.
Source: Bloomberg L.P.; data for the Russell 1000 Value Index and Russell 1000 Growth Index as of 6/30/2024. Diversification does not guarantee a profit or eliminate the risk of loss.
Source: Bloomberg L.P. and FactSet as of September 30, 2024.
Matt Brill talks about his expectations for the Federal Reserve, his bullish view of investment grade credit, and opportunities in high yield, emerging markets, commercial real estate, and retail.
A strong macro and fundamental backdrop and continued moderating inflation could create a constructive environment for fixed income for the remainder of 2024 and into next year.
With the Fed poised to continue cutting rates, investors have the all-clear signal to move off the sidelines, perhaps into intermediate term bonds.
Important information
NA3899811
Image: d3sign / Getty
All investing involves risk, including the risk of loss.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Earnings per share (EPS) refers to a company’s total earnings divided by the number of outstanding shares.
The Russell 1000® Growth Index, a trademark/service mark of the Frank Russell Co.®, is an unmanaged index considered representative of large-cap growth stocks.
The Russell 1000® Value Index, a trademark/service mark of the Frank Russell Co.®, is an unmanaged index considered representative of large-cap value stocks.
The S&P 500® Index is an unmanaged index considered representative of the US stock market.
The S&P 500® Energy Index includes stocks in the S&P 500 Index classified as energy companies based on the Global Industry Classification Standard methodology.
The S&P 500® Financials Index includes stocks in the S&P 500 Index classified as financial companies based on the Global Industry Classification Standard methodology. The index is market-cap weighted.
The S&P 500 Industrials Index includes stocks in the S&P 500 Index classified as industrial companies based on the Global Industry Classification Standard methodology. The index is market-cap weighted.
The Global Industry Classification Standard (GICS) was developed by and is the exclusive property and a service mark of MSCI Inc. and Standard & Poor’s.
Book value is a company’s total assets minus liabilities and intangible assets.
A discount measures how much less one stock (or index) is trading compared with another stock (or index).
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
A value style of investing is subject to the risk that the valuations never improve or that the returns will trail other styles of investing or the overall stock markets.
The opinions referenced above are those of the authors as of Nov. 12, 2024. These comments should not be construed as recommendations but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.
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