Market Titans

A history of market concentrations

Antony Wilson

Investment Analyst

Throughout US stock market history, a small number of companies have consistently been the largest, but the extent of market concentration is variable and is currently at the highest level since the 1960s.

The top 10 US companies by market capitalisation as of 25 October 2024 accounted for c.35% of the S&P 500’s total market-cap. Technological advancements have created new growth opportunities, with a few mega-cap tech stocks now dominating the US (and global) markets. In recent years, companies like Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia, and Tesla— known collectively as the 'Magnificent Seven'—have come to define this dominance. The US equity market (which makes up more than 60% of the global whole) is more concentrated than at any point in the last 75 years. Investors should think carefully about how their equity portfolios are positioned and whether more diversification would be preferable.

Periods of market concentration have been a feature of US stock market history and have tended to rise and fall with the ebb and flow of antitrust enforcement.

A history of market concentration

The first stock exchanges emerged in the late 18th century, giving them a relatively short age of just 250 years. Though still young, markets have clearly demonstrated patterns in their concentration of stocks.

The rise of the Magnificent Seven has seen market concentration increase rapidly over the past decade. These titans have grown so influential that, as of 25 October 2024, they accounted for roughly 35% of the S&P 500. Even when we zoom out to a global scale, market concentration remains, with the U.S. holding 60% of the global equity market value (measured by the S&P 500) by market capitalisation.

Contrary to alarmist headlines, market concentration isn't inherently indicative of a bubble; rather, when a company drives significant wealth creation, its high valuation can be arguably justified. By the end of 2023, the top ten companies in the S&P 500 were responsible for generating 69% of the index’s total economic profit, which measures the surplus earnings a company makes after covering its costs, including capital. In this context, the top ten companies making up 27% of the index’s market capitalisation doesn’t seem so ridiculous.

In the 1930s and 1960s, the top ten companies held more than 30% of the market's total value, with General Motors, AT&T, and Standard Oil regularly occupying leading positions. For example, in 1965, IBM alone accounted for 8% of the total market capitalisation, a figure that is comparable to Apple’s market share today. However, in both these historical cases, the market did not remain this concentrated for long. Following the mid-60s, the US equity market went through a 30-year trend of decreasing concentration at the top.

The rise and fall of Market Titans

With the impressive trajectory chartered by the Magnificent Seven, even active managers baulking at the high prices have been tempted to jump on board as the rally showed no signs of stopping.

But even Titans can fall, right? Since 1950, only eleven stocks in the S&P 500 have maintained a top three spot for more than two consecutive years and although their time at the top was relatively short-lived, the majority remain in the index (except for Kodak).

So, what can we learn from history about how the stock market’s biggest players can stay at the top? Companies like AT&T, Exxon, IBM, GE and Apple all boasted extended periods as US stock market leaders. You could attribute this to strong branding, diversification and leadership, but the root of their prevalence more likely lies in their ability to operate as a market’s sole player, for a time at least. AT&T, for instance, was a telecommunications pioneer, maintaining a monopoly over the telephone industry for much of the 20th century through its Bell System. It was vertically integrated, overseeing everything from the manufacturing of phone equipment to the delivery of phone services. It created a moat around its business that was practically impenetrable. This was so evident that the United States Department of Justice filed the United States v. AT&T, an antitrust lawsuit, in 1974. Believing that it would lose this lawsuit, the company proposed a breakup instead, yielding its monopolistic power and, not long after, its position at the top.

Like AT&T, Exxon also exercised a form of market control to sustain its dominance, though in a different sector—oil. To understand Exxon’s position of historical market dominance, it's essential to explore its origin. Exxon is one of 33 companies that emerged from the fracturing of Standard Oil in 1911 brought about by the antitrust lawsuit: the United States v. the Standard Oil Company. Prior to this, it is estimated that Standard Oil controlled roughly 90% of the United States’ oil refining capacity. Its descendant, Exxon, grew to control around 7-10% of global oil production in the 1970s and later merged with Mobil (another direct descendant of Standard Oil) in 1998, allowing it to hold the title of the US stock market’s largest firm for six consecutive years. However, following 2014, Exxon Mobil's market position declined due to a combination of falling oil prices, increased competition from shale producers, and the beginning of a global shift toward renewable energy.

Antitrust activity and market concentration

During the 1920s and 1930s, infrequent antitrust enforcement, as administrations favoured industry-government cooperation, led to rising concentrations. Post-WWII, the U.S. government pursued an aggressive antitrust agenda to invigorate competition and revive the economy, resulting in notable lawsuits such as U.S. v. IBM in the 1960s and U.S. v. AT&T in the 1970s. These actions contributed to the trend of decreasing concentration amongst the top stocks in the following decades.

In the years following the 1970s, antitrust actions diminished, influenced by the Chicago School’s laissez-faire economic theories and later by the regulatory approach of the Obama administration. This reduction in enforcement coincided with a resurgence in market concentrations. Recent antitrust scrutiny, including Microsoft's acquisition of Activision Blizzard, investigations into Apple, and Google’s dominance (and the interlinkage between the two), may signal a shift toward stricter regulatory measures. It’s worth noting that JD Vance, now Donald Trump’s Vice President, has called for the breakup of America’s big tech firms, yet on Trump’s other shoulder, tech billionaires who want to defend their market positions continue to vie for his favour.

Administrative changes could quickly alter what has been a favourable landscape for the most dominant firms. For example, it is estimated Nvidia controls between 70% and 95% of the AI chip market, with its 78% gross margin reflecting significant pricing power.

In short

Periods of market concentration have been a consistent feature of U.S. stock market history, often shifting in response to changes in antitrust enforcement.

Investors should carefully assess the impact of their passive portfolios and consider whether they are overly exposed to a small number of dominant firms. Diversifying across sectors and asset classes can help mitigate risks associated with concentrated market power and ensure a more balanced approach to long-term growth.

Historically, strong regulatory actions have often led to a more diverse market landscape, while periods of weaker enforcement have allowed a few key players to dominate. Learning from these trends, today’s dominance of the Magnificent Seven may be vulnerable to heightened antitrust scrutiny under Trump’s administration. Ultimately, investors should reassess their equity allocation and consider whether an alternative approach—such as adopting active management or increasing exposure to “small-cap” companies—might be a better fit, especially if their current strategy involves simply ‘buying the index’.