Market concentration - what does it mean for investors?​

If you haven’t heard the term ‘market concentration’ before the idea is quite simple: it’s where a few large companies make up a big part of a stock market. For investors, this means the performance of just a handful of companies can have a big influence on how their investments perform.

How does market concentration happen?

Companies that grow their sales and profits and do better than their competitors often attract more investors. As demand for their shares increases their share prices rise, they become a larger part of the overall stock market and the indices that track it. Funds that follow those indices will also have more of their money invested in these companies. Over time, successful businesses serving large and growing markets can become so big that their performance has a significant influence on the wider stock market. We’ve seen this happen with several major US technology companies.

Why US market concentration matters

Market concentration is particularly noticeable in the US where the ten largest companies make up more than a third of the stock market. But it matters to investors around the world too. The US accounts for almost two-thirds of the MSCI ACWI, a commonly used global stock market index. Nine of the world’s 10 largest companies are listed in the US and together make up more than a fifth of the index. So, the performance of a relatively small number of US companies can have a significant impact on global investments.

An AI boost

The rise of AI has added to this trend. Growing excitement about its potential has attracted investors to US technology shares, helping some already-large companies become even bigger as well as leading to a new market giant in the form of Nvidia.

And this trend could continue. More large AI-related companies could join the stock market soon, while continued growth in sales and profits could help existing companies grow further. Together, this could mean an even greater share of the market being concentrated in a relatively small number of tech companies.

Why does market concentration matter to investors?

Even if you invest through a global fund, a relatively small number of US companies can still have a substantial impact on how your investments perform. Because they make up such a large share of the market, their share price movements carry more weight. So, when they rise, they can lift the wider market significantly, but when they fall, they can drag it down too. 

That doesn’t mean market concentration is necessarily a bad thing. Many markets around the world have some degree of concentration and it can simply reflect the success of companies that have grown strongly and outperformed their competitors. Even so, it’s important to understand where your investment risks and returns come from, particularly if they depend heavily on the performance of a small number of companies.

Today’s market leaders may not be tomorrow’s

Today’s largest US companies may dominate the market, but their place at the top is not guaranteed. Their share prices could fall if their growth and profits don’t live up to investors’ expectations. Questions may also arise over whether the trillions of US dollars likely to be spent on new AI data centres in the next few years will deliver strong growth and profitability. Higher interest rates, new regulations, supply bottlenecks or a market slowdown could create further challenges. 

It’s worth remembering, too, that market leaders change over time, although it’s difficult to predict when or how the change will happen. Tomorrow’s winners could be different companies, industries or markets, including the companies that successfully use AI to become more productive and profitable.

What can investors do about market concentration?

Market concentration doesn’t necessarily mean investors need to make big changes. Trying to predict when markets will change direction, or which companies will lead next, can be difficult. A more useful starting point is to understand how diversified your investments really are.

Simply owning lots of funds or shares doesn’t always mean your investments are well spread. 

A fund may hold hundreds of companies, for example, but a significant proportion of its value could still depend on a relatively small number of them. 

Concentration can also build up in your own portfolio. You might own a large amount of one company through an inheritance or employee share scheme, or simply because shares you already own have risen significantly in value. 

Diversifying across different companies, industries, company sizes, countries and types of investment can help reduce reliance on any one area. It can’t prevent losses, but it can soften the impact if one company, or small group of companies, lose favour with investors or perform poorly. 

Market concentration is a normal feature of investing and isn’t necessarily something to worry about. What matters is understanding where it exists in your investments and keeping a long-term perspective as markets and their leaders change over time.