Let’s say you want to explain stock returns and performance. What factors matter?

You could make a very long list, but if you ask Goldman’s Scott Rubner, all you really need to consult are passive flows and index construction, which is a roundabout way of broaching a familiar subject: Extreme concentration and the extent to which the ongoing active-to-passive shift helps perpetuate a self-fulfilling prophecy whereby a handful of mega-caps gather ever more heft.

“If you allocate $1 of your newly available 401k dollars into the SPY ETF, 34 cents go into the top 7 Magnificent stocks,” Rubner reminded clients, in his first note of the new year.

The figure on the left’s exhausted by now, but the figure on the right’s not as well-documented. It illustrates the “shrinking” US equity market, where publicly-traded issues have halved since the dot-com boom.

That recalls “Liquidity’s Drying Up For Non-US Corporates,” published here on January 3. In that linked article, I quoted SocGen’s Andrew Lapthorne who, after lamenting worsening liquidity for non-US shares, suggested that regardless of locale, liquidity’s thin and getting thinner for names with less than a $2 billion market cap. Small wonder, he said, that “many companies continue to debate the purpose of a public listing.”

Speaking of Lapthorne’s laments for the state of increasingly monolithic markets, he flagged the figure below in his latest, published January 13.

As you can see, it’s becoming harder and harder to beat cap-weighted benchmarks dominated by America’s monopolistic mega-caps.

In the early 2000s, three-quarters of a 10,000-stock universe outperformed the S&P 500 and the MSCI World on a rolling three-year basis. Now, that share’s down to just ~30%.

Lapthorne called that “one of the most depressing charts we hold in our armory.” “Only one in four are currently beating the S&P 500,” he sighed. “Rather depressing for those seeking to beat these indices.”