We tend to get bent out of shape and otherwise pretend it’s an affront to nature when equity rallies are narrow and gains concentrated.

Certainly, a concentrated market can be perilous. Mathematically, if two or three or five names are responsible for the vast majority of an index’s performance and something bad happens to undermine those names, the index is in jeopardy unless and until other stocks pick up the dropped baton.

Relatedly, it’s not ideal when the decomposition of returns for an index representing hundreds of stocks shows that all but a half-dozen of them are treading water in one sense or another at a time when the benchmark itself is swimming along briskly.

I could go on. There are any number of statistics you can use to show that concentrated markets bode ill or if they don’t necessarily portend doom and gloom, they at least raise the odds that any drawdown will be larger, and so on.

But, at times like these (i.e., during periods when markets are narrow and returns undeniably concentrated), we should remember that it’s hardly unusual for a handful of stocks to account for a very large share of index returns. In the first half of 2023, the so-called “Magnificent 7” returned some 60%, while the other 493 stocks managed just 5%. The top 10 stocks accounted for more than 80% of the S&P’s gains.

Is that extreme? Yes. In fact, it’s well more than double the median looking back nearly three decades. However, it’s not unusual in the sense that the median is 32% — so, the top 10 stocks typically account for a third of the S&P’s return in a given year.

“While the narrowness of the market rally is certainly notable, it’s also true that in any given year equity returns tend to be concentrated in a small group of outperformers,” Goldman’s David Kostin remarked. “Excluding the top 10 contributors in each year, the S&P 500 would have delivered an 8% average annual return since 1990 versus 12% for the full index.”

In addition, we often pretend it’s a mystery why a small handful of stocks are dominant when we can all (every, single one of us, including laypeople who otherwise couldn’t tell you the first thing about equity markets) readily explain it.

In that context, it was somewhat refreshing to hear Bloomberg producer Joe Weisenthal “play devil’s advocate” during a chat with James Montier late last month. “I mean, obviously the 2010s were this extraordinary decade for Big Tech, and, you know, Big Tech is rallying again lately. But the other thing about that decade is it’s not just that those stocks did well, those companies did really well,” Joe said. “I mean, they really did do extraordinarily well from like a business and profit standpoint.” “Absolutely,” Montier conceded.

Yes, “absolutely!” In fact, they did so well “from like a business standpoint” that they became functionally inseparable from life as we know it.

The simple figure above from Goldman will be familiar to some regular readers, but Kostin has updated it. The message is clear: This was apples-to-oranges for a half-dozen years (at least) leading into the pandemic, and it’s probably going to be apples-to-oranges going forward too. (Note that the “catch up” for the rest of the index in 2021-2022 was an optical illusion. Mega-tech sales were lapping impossible top-line comps.)

Obviously, the above doesn’t mean it’s necessarily a good idea to run out and buy mega-tech trading on — I don’t know, 31x, or whatever. It’s just to say that it’s not rare for a handful of stocks to dominate the index, and it’s usually not a mystery why the stocks which do are dominant.

As Weisenthal put it in the conversation with Montier, “setting aside, you know, valuations and multiples, the companies did do really well and captured a huge share of overall corporate profits. Right?”

Right.