Market leadership is becoming increasing unhealthy with a further increase in stock concentration this January versus last year. While the weight of the top 50 stocks within S&P 500 remains roughly unchanged, the largest 10 stocks have continued to increase (now at 33.1% weight) at the expense of the next 40 (down to 35.8%) and the broader index ( Figure 7: Largest 10 more Crowded than Next 40 Stocks). Cap-weighted S&P 500 trounced its equal weighted version by ~3% YTD compared to ~12% outperformance in all of 2023. This extremely concentrated setup (50-60 year high, comparable to Nifty-Fifties, Figure 4) intensifies the battle between index funds and active funds. In particular, it presents a high hurdle for active managers to outperform cap weighted benchmarks given the narrow opportunity set of winners tilted towards mega-cap companies ((((( Figure 16: Index Performance Contribution by Stocks - Narrow Leadership). In fact, last year active managers delivered one of their worst relative performances on record with only 23% of Large-cap Core funds outperforming their benchmark (vs. 66% in 2022 and 46% MTD, Figure 1). However, there were some brighter spots such as Value managers (49% outperforming the benchmark in 2023).
Most institutional investors have been adding exposure to Mag7 starting in 1Q23 but their weights still remain shy of pre-pandemic levels ( Figure 2); specifically, Investment Advisers ( Figure 35) and Mutual Funds ( Figure 36) chased performance while by contrast the value conscious Pension Funds cut exposure ( Figure 38). Overall, the pace of adding Mag7 to fund portfolios lagged the increase in their benchmark weight, which was further exacerbated by passive funds reinforcing this momentum trade ( Figure 40). Based on our estimates, the negative active weight for institutional investors in Mag7 increased further to ~-3% versus the S&P 500 index composition in 3Q23 ( Figure 3). Notably, investors were overweight GOOG and META while underweight the rest of the Mag7 especially AAPL at an estimated active weight of -1.4%. On the other hand, the non-institutional investors were significantly overweight Mag7 at +9.6%, specifically within AAPL (+4.2%), TSLA (+2.4%) and AMZN (+2.3%). Interestingly, Hedge Fund short interest in Mag7 remains elevated, which could drive even more extreme concentration if there is covering ( Figure 31). Even though Mag7 represents 29% of index weight within S&P 500, their share of total expected 2024 earnings is at 21%. However, of the expected earnings growth this year, their contribution is far more significant at 34% ( Figure 9). If stock leadership remains narrow in 2024, active managers may find themselves in a vicious cycle of again having to compete with momentum chasing index funds and being forced to chase an even more concentrated benchmark.
Figure 3: Institutional and Non-Institutional Investors: Estimated Active Weights in Mag7
Includes only Long Positions of S&P 500 stocks
Source: J.P. Morgan Equity Macro Research, 13F Filings and FactSet
Market concentration increased further in January. Cap-weighted S&P 500 trounced its equal weighted version by 2.9%, winning in 12 of the 17 trading sessions (71%) so far compared to 12.4% outperformance in all of 2023 (with 56% win ratio).
Figure 4: Peak Concentration in 50-60 years
Source: J.P. Morgan Equity Macro Research
Figure 5: Largest 10 more Crowded than Next 40 Stocks
Source: J.P. Morgan Equity Macro Research
Figure 6: PE Spread of Largest 10 Stocks vs Rest of S&P 500 at ~90%ile
Source: J.P. Morgan Equity Macro Research
Figure 7: Buyback Announcements Coming off Record
Source: J.P. Morgan Equity Macro Research, Bloomberg Finance L.P.
Figure 8: Magnificent 7 Represents 12% of 2024 Sales but 29% of 2024 Consensus Sales Growth
Narrow Leadership. Few stocks explain most of the index returns comparable to TMT extremes.
Figure 11: Index Performance Contribution by Stocks - Narrow Leadership
Rolling 12 Months, for instances when index returns > 15%
Source: J.P. Morgan Equity Macro Research
Figure 12: Performance of Largest 10 Stocks vs Rest of S&P 500 ...
Source: J.P. Morgan Equity Macro Research
Figure 13: … and vs Next 40 Largest Stocks
Source: J.P. Morgan Equity Macro Research
Active Managers Performance. Active managers delivered one of their worst relative performances on record with only 23% of Large-cap Core funds outperforming their cap-wtd benchmark this past year (vs. 66% in 2022 and 46% MTD, see Figure 3).
Figure 14: Meaningful Large-cap Underperformance in 2023
Source: J.P. Morgan Equity Macro Research, Bloomberg Finance L.P.
Figure 15: 2024 YTD Active Manager Performance
Source: J.P. Morgan Equity Macro Research, Bloomberg Finance L.P.
Figure 16: Active Manager Relative Performance: 2023 vs. 2022
2023 & 2022 Performance vs Benchmarks
Source: J.P. Morgan Equity Macro Research, Bloomberg Finance L.P.
Figure 17: Equity Exposure of Macro Funds and L / S Hedge Funds
Estimated Market Cap Value Held
Source: J.P. Morgan Equity Macro Research, Factset, Bloomberg Finance L.P.
Figure 18: Fund Flows: Passive as % of Equity AUM
% of Total Equity AUM (left)
Source: J.P. Morgan Equity Macro Research, EPFR
Figure 19: Large vs. SMid Active Manager Performance
% of Funds Beating Benchmark
Source: J.P. Morgan Equity Macro Research, Bloomberg Finance L.P.
Figure 20: Russell 1000 – % of Funds Beating
Since 2003
Source: J.P. Morgan Equity Macro Research, Bloomberg Finance L.P.
Figure 21: Russell 1000 Growth – % of Funds Beating
Since 2003
Source: J.P. Morgan Equity Macro Research, Bloomberg Finance L.P.
Figure 22: Russell 1000 Value – % of Funds Beating
Since 2003
Source: J.P. Morgan Equity Macro Research, Bloomberg Finance L.P.
Magnificent 7 - Estimated Active Weight. In order to remain competitive investors have been adding exposure to the Mag7/Mega Caps. Thus far, however, rise in index weight has outpaced the investors chase on Mag7 exposure resulting in increasing negative active weight of these stocks based on our estimates. Institutional Investors on aggregate have negative active weights of ~-3% on Mag7 with overweight GOOG, META; and underweight rest of Mag7 especially AAPL at -1.4% estimated active weight. On the other hand the non-institutional investors had been massive overweight on Mag7 at +9.6% mainly concentrated in 3 stocks—AAPL (+4.2%), TSLA (2.4%) and AMZN (2.3%).
Figure 23: Market Cap Expansion of Magnificent 7 Stocks
$ trillions, *3M implied assumes a repeat of last 12M performance
Source: J.P. Morgan Equity Macro Research
Figure 24: Magnificent 7 Index weight in S&P 500
*3M implied assumes a repeat of last 12M performance
Source: J.P. Morgan Equity Macro Research
Figure 25: Investment Advisors: Estimated Active Weights in Mag7
Includes only long positions in S&P 500
Source: J.P. Morgan Equity Macro Research, 13F Filings and FactSet
Figure 26: Mutual Fund Managers: Estimated Active Weights in Mag7
Includes only long positions in S&P 500
Source: J.P. Morgan Equity Macro Research, 13F Filings and FactSet
Figure 27: Institutional Investors: Estimated Active Weights in Mag7
Includes only long positions in S&P 500
Source: J.P. Morgan Equity Macro Research, 13F Filings and FactSet
Figure 28: Non-Institutional Investors: Estimated Active Wts in Mag7
Includes only long positions in S&P 500
Source: J.P. Morgan Equity Macro Research, 13F Filings and FactSet
Figure 29: Magnificent 7 Index weight in Russell 1000
*3M implied assumes a repeat of last 12M performance
Source: J.P. Morgan Equity Macro Research
Figure 30: Magnificent 7 Index weight in Russell 1000 Growth
*3M implied assumes a repeat of last 12M performance
Source: J.P. Morgan Equity Macro Research
Short Interest in Magnificent 7 stocks is on the rise at a faster pace versus the market.
Figure 31: Short Interest / Shr Out. for Mag-7
Source: J.P. Morgan Equity Macro Research, S3 Partners
Figure 32: Short Interest / Shr Out. for Russell 3000
Source: J.P. Morgan Equity Macro Research, S3 Partners
Figure 33: Short Interest (notional) for Mag-7
Source: J.P. Morgan Equity Macro Research, S3 Partners
Figure 34: Short Interest (notional) for Russell 3000
Source: J.P. Morgan Equity Macro Research, S3 Partners
Magnificent 7 Ownership. Based on 13-F filings, the S&P 1500 is roughly 75% institutional owned and 25% non-institutional (e.g. insider, individuals, funds managing <$100M of in-scope securities, certain foreign investors, etc.). Compared to the benchmark index, magnificent 7 stocks are underowned by institutions (~67%), with funds only adding exposure in recent quarters. In fact, in the past 5 years, institutional ownership moved from ~70% to a low of 65% in mid-2022 after the nearly 50% decline in magnificent 7 stocks from peak. Among institutions, investment advisers, mutual funds and index funds have consistently raised their ownership stakes with magnificent 7 stocks LTM while Pension Funds have, on the contrary, been trimming exposure on the margins (see Figure 36).
Figure 35: Investment Adviser - Ownership %
Magnificent 7, Based on 13-F Filings
Source: J.P. Morgan Equity Macro Research, Factset
Figure 36: Mutual Fund - Ownership %
Magnificent 7, Based on 13-F Filings
Source: J.P. Morgan Equity Macro Research, Factset
Figure 37: Hedge Fund - Ownership %
Magnificent 7, Based on 13-F Filings
Source: J.P. Morgan Equity Macro Research, Factset
Figure 38: Pension Fund - Ownership %
Magnificent 7, Based on 13-F Filings
Source: J.P. Morgan Equity Macro Research, Factset
Flows & Positioning. Stock-level ownership data indicates significant disparity in relative S&P 1500 sector positioning of investor types (see Figure 37). Broadly, Hedge Funds report larger sector overweights than Mutual Funds and Pension Funds, whose holdings more closely resemble the market at large, but we note that Hedge Fund positions include only their long exposure. Asset Managers have had a relative preference (versus index weights) for Healthcare (+1.1%), Industrials (+0.8%) and Financials (+0.7%) while being underweight Technology (-1.1%), Discretionary (-1.0%) and Communications (-0.8%). Mutual Funds had a similar relative preference favoring Healthcare (+1.3%), Industrials (+0.6%) and Financials (+0.6%) while being underweight Technology (-1.2%), Communication (-1.2%) and Discretionary (-1.1%) . In the past quarter, they notably went further underweight Technology (-0.2% to -1.2%) especially Technology Hardware/Equipment. Pension Funds were not as synchronized with Asset Managers/Mutual Funds favoring Healthcare (+0.7%), Communications (+0.6%) and Utilities (+0.4%) while underweight Technology (-0.9%), Energy (-0.8%) and Industrials (-0.7%).
Figure 39: Industry Positioning by Investor Type (3Q23)
Over / underweight relative to S&P 1500
Source: J.P. Morgan Equity Macro Research, 13F Filings and FactSet. *Includes only long positions.
Figure 40: Cumulative Passive vs. Active Flows
Since 2010
Source: J.P. Morgan Equity Macro Research, EPFR
Figure 41: Fund Flows: Asset Class
Cumulative flows, USD billion
Source: J.P. Morgan Equity Macro Research, EPFR
Mega-Cap Crowding. We expect market concentration to persist while there is a build up in Defensives crowding as the cycle enters later innings. We recommend investors favor Secular Growth over Speculative Growth (e.g. Health Care over Technology) and the cheaper pockets in Quality (like Utilities, Staples). For more details, please see our 2024 Equity Outlook.
Figure 42: Mega-Cap Crowding Reversed at the turn of the year
Source: J.P. Morgan Equity Macro Research
Figure 43: … building up again?
Source: J.P. Morgan Equity Macro Research
Opportunities in Defensives. In the Long/Short space, Value materially outperformed in 2nd half of 2023, Quality and Forward Growth factors were the clear winners. Similarly, Bond fund flows exceeded equity fund flows in 2023 by >2x ($170B vs. $80B, Figure 39). Even then Defensives are trading at 1x PE multiple discount over cyclicals (14 %ile, Figure 42). Specifically, Low Beta is trading at 2x PE discount vs market (0.2 %ile, Figure 43) – the cheapest in 30yrs.