How many pseudo-laments for a narrow stock rally can you stand?

A lot, I hope, because God knows I’ve subjected readers to plenty over the past — checks notes — eight years.

As a reminder: This is a perennial “concern.” In other words, hand-wringing over a narrow US equity market dominated by a handful of mega-caps is nothing new. It’s not a post-pandemic phenomenon. Well, it is, but it’s not solely a post-pandemic phenomenon.

What’s changed is the acuteness of the issue, which is to say the market cap dominance of the top names exceeds every other such extreme by a margin so wide that the current episode might fairly be described as “not comparable.”

As the familiar figure above (this one’s from Stifel, but you’ve surely seen it before) shows, the top 10 stocks comprise nearly 35% of index market cap. That share during the height of the 2021 “everything bubble” was 30%. At the height of the dot-com bubble, it was 26.5%.

A corollary — I guess I should call it a quasi-corollary — is that very few names are able to outperform the index.

Indeed, as the figure below, from BofA’s Michael Hartnett, shows, fewer than a third of companies managed to best the S&P in 2024, the second-lowest share for any year since 1999.

That’s part and parcel of the AI trade and the extent to which the largest companies with the most to gain from Jensen Huang’s “new industrial revolution” are all anyone’s interested in owning.

In his latest, Hartnett described “investor capitulation into [the] AI leadership,” and accordingly poor market breadth. He went on to note that the Magnificent 7 now trades on a trailing multiple of 62x.

That might seem unsustainable to you, but remember: Trying to call a top based on stretched valuations is a dicey endeavor, and besides, “history shows only central banks end melt-ups,” as Hartnett put it.

If inflation stays stubborn, and the Fed turns hawkish — say in Q1 — that’s when it’ll be time to quietly head for the exit.