Should investors worry about US market concentration?

Much of the US stock market gains over the past couple of years have been driven by the tech giants – Alphabet, Amazon, Apple, Microsoft, Meta, NVIDIA and Tesla, collectively known as the “Magnificent Seven”.

Today, these seven companies account for over one-third of the market capitalisation of the US equity index. Their combined value exceeds that of the whole equity market in many other major economies.

With most of the equity market return coming from just these seven companies, some commentators have raised concerns over whether such concentration poses a risk to investors.

While we remain mindful of these risks, and bearing in mind that investing always comes with risk, which we monitor closely, we don’t share these concerns over the Magnificent Seven at present.

First, it’s not unusual for a region’s stock market performance to be concentrated in a particular sector or handful of companies. By way of comparison, the top five companies in the US represent about 30% of its equity market, which is similar to the Eurozone, the UK, Canada and Australia.

Second, the Magnificent Seven may all be “tech” companies, but there is diversity among them. Their businesses span semiconductors, software, cloud services, and consumer platforms, each with distinct revenue streams and risk profiles.

Third, the dominance of the Magnificent Seven has been driven by their earnings, not led by sentiment. Their strong performance reflects scalable business models, sustained investment in high-margin growth areas and durable competitive advantages. All these factors support continued strong earnings growth over the medium term.

Finally, stock market concentration doesn’t automatically increase the risks for investors. When looking at key measures of risk such as volatility (how far prices move up and down) and drawdowns (how far markets fall from their peak before recovering), recent trends show little variation from historical patterns.

Of course, past performance is not a reliable guide to future performance. But when modelling potential future risks, we expect that the overall market could become slightly more volatile, but only modestly – even if the Magnificent Seven maintain their current share of the US equity market.

Bottom line

While US equity concentration is elevated, it is not unprecedented and does not inherently signal higher risk or potentially lower returns in future. The success of the Magnificent Seven is underpinned by the fundamental strengths of their businesses and exposure to structural growth themes such as Artificial Intelligence (AI) and digital infrastructure. The key risk to monitor is whether the mood shifts toward speculative excess, or if there are other signs that indicate a slowdown in these companies’ revenue and earnings growth.

Looking ahead to year end and beyond

It’s been an eventful year for markets, as investors have navigated shifts in US trade policy, geopolitical uncertainty and signs that global economic growth may be slowing. There were bouts of volatility in equity markets in the first half of the year, but despite the turbulence, the world’s major stock markets have delivered double-digit returns year-to-date.

This has been underpinned by corporate earnings, particularly in the US, while in the Eurozone investors are optimistic about increased defence spending and Germany's increased public spending.

Over the rest of the year, economic growth in both the US and the rest of the world looks likely to moderate. However, the combination of monetary easing and supportive fiscal spending in the US and Germany should aid a rebound in economic activity in 2026, which bodes well for global equity markets in the longer term.

Spotlight on industrials

The industrials sector spans aerospace and defence, heavy machinery, electrical systems and diversified industrials – and it has outperformed this year, delivering a 16% gain versus 13% for broader equities.

This performance has emerged despite a somewhat challenging macroeconomic backdrop. Industrial companies have sought to tighten costs, protect profit margins and lean into structural growth drivers for the industry. However, the regional dynamics remain mixed. In the US, tariff uncertainty and inflationary pressures have tempered customer appetite, which companies have responded to by adjusting inventories and renegotiating contracts with suppliers. In contrast, the European economy is showing early signs of recovery, with the manufacturing Purchasing Managers Index (PMI), an economic indicator comprised of surveys completed by managers in the industry, having tipped into expansionary territory and industrial companies noting improving demand.

Overall, the year-to-date performance of the industrials sector reflects a balanced mix of P/E multiple expansion (the price-earnings ratio is a valuation metric which looks at a company’s share price in relation to its earnings per share).Sector-wide, P/E ratios are now above five-year averages, and in addition, company earnings have risen an average of 11% since January.

Future performance of the sector will hinge on clarity around US trade policy, lower interest rates and economic momentum that’s reflected in PMI data. Longer-term themes that indicate potentially strong demand for industrials include increased defence spending, onshoring, sustainability-linked projects, and AI-driven transformation. For now, industrials are navigating a complex but opportunity-rich environment with multiple levers for growth and resilience.

Disclaimer

The information and opinion contained in this article should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt any investment strategy and are presented for information only. Any views expressed are based on information received from a variety of sources which we believe to be reliable but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.

Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments, and the income from them, may fall as well as rise and is not guaranteed. Investors may not get back the original amount invested.