Large-cap technology stocks are not only fueling the U.S. stock market, they are also holding the world together. U.S. stocks now make up 70% of the MSCI World Index, the benchmark for large- and mid-cap companies in 23 developed markets. This level represents the largest weight per country since the index’s inception in 1986; and, consequently, the lowest exposure to non-US securities. The top five largest-cap U.S. stocks – Apple, Microsoft, Nvidia, Amazon and Meta – account for nearly a fifth of the index. The MSCI World Index shifts regional and country weights based on broader economic trends. Japanese stocks accounted for over 40% representation in the 1980s before the asset price bubble. In the early 2000s, European markets grew to more than a third of the weight of the index thanks to strong economic growth. However, no single market has reached such a high level of concentration as the US. To put this in perspective, “if you passively allocate $1 of your retirement account to URTH,” – the corresponding MSCI World Index iShares ETF – “70 cents go to US stocks and 18 cents to the top 5 US stocks,” The Goldman Sachs CEO Scott Rubner said in a Feb. 12 note. Lack of diversification is risky because it makes the overall market dependent on company-specific factors. But for asset managers – particularly those focused on delivering returns over a shorter time frame – there are no clear diversification alternatives that can generate growth. Risks Peter Berezin, chief investment strategist at BCA Research, said this concentration is reminiscent of cases that preceded sharp market downturns. The high levels of market concentration in the late 1920s and early 1930s, as well as in 2000, coincided with a market high, he noted. Ironically, the stock market tends to rise during periods of increasing concentration, Berezin said, though he noted that it is unclear whether concentration will increase further. “The market is on pretty dangerous ground right now,” Berezin said. “The risk of something going wrong is quite high. So I think long-term investors should take what they’re seeing now, with this megacap tech rally, as an indication that the party is probably over by the end of this year .” This massive tilt toward U.S. stocks relative to the rest of the world comes as major technology companies have seen stocks rise on bets that artificial intelligence will bolster profits. Nvidia was the clear winner of last year’s AI-fueled rally, up more than 200%. Meta Platforms, Alphabet, Microsoft and Apple also posted strong gains last year. Four of the five stocks in this group are up year to date. NVDA GOOGL,META,MSFT,AAPL 1-Year Mountain Big Tech Winners Over the Last Year “The premium they demand is dangerous for us. As long as the momentum is in the ‘Magnificent Seven,’ short-term portfolio performance will depend on the good and evil.” said Phillip Colmar, managing director and global strategist at MRB Partners, referring to the seven largest U.S. stocks by market capitalization. “There is a risk in the final stages of this type of chase, when everything is really frothy and the euphoria is enormous, that if you don’t participate, you get boxed in.” The strategist also highlighted similarities between the current highly concentrated rally and the dotcom bubble of the late 1990s, when many short-term investors who had diversified away from technology in 1999 were wiped out shortly before the bubble erupted in early 2000. , while high concentration is generally unhealthy for markets: “there’s a lot more active risk in not owning these stocks than in owning them, because that’s what’s in the overall market” , according to Mike Dickson, head of research and product. development at Horizon Investments. “If you’re an active manager, there’s no way you have a massive overweight in all these names. And so it’s certainly challenging from an active management perspective. But that doesn’t necessarily mean it can’t continue to happen,” Dickson said. Opportunities elsewhere? Another factor contributing to the lack of diversification is the repatriation of funds from foreign markets to the United States. In particular, the crisis of confidence in the Chinese stock market and the geopolitical difficulties in Europe have dented sentiment in the main foreign markets. Colmar, which advises diversifying away from the US market, highlighted Japan as a bright spot in Asia, which is also one of Warren Buffett’s top picks. Although the latest economic growth shows the country has slipped into a recession, Colmar said the country is a tactical buy. “I would like to see the national data improve sequentially. That would really support the case,” Colmar said. “But I don’t think it starts there; I think it starts with a global trade cycle.” Combined with a cheap yen and government-backed domestic momentum, there could be potential that could be unlocked, he said. Japan’s Nikkei 225 will rise more than 14% in 2024, outpacing the S&P 500 Index’s 4.9% rise. Over the past 12 months, the Nikkei has rallied 39.3%. Furthermore, it is trading at record levels not seen in more than 30 years. On the other hand, portfolio managers are mixed about the opportunities presented by European equities. European corporate earnings are outperforming. Meanwhile, general pessimism towards the eurozone means stocks are trading at a discount and creating an opportunity there, Colmar said. “In a world where you have decent, underlying global growth, and perhaps a higher bond yield environment, you want to be in a position where you have earnings support and valuations on your side,” the strategist. Berezin, however, remains more pessimistic about the eurozone’s prospects. He advised investors to focus on sectors, rather than regions, when evaluating their allocations. While European stocks are cheap because of the region’s few tech names, the technology it owns “is actually quite expensive,” Berezin said, citing Dutch chipmaker ASML as an example. Since the beginning of the year, the Europe Stoxx 600 index has grown by only 2.6%, underperforming the US market index. Individual country indices are not doing much better. The British FTSE 100 index lost 0.3% on an annual basis, while the Spanish IBEX 35 index lost more than 2%. While the German DAX and French CAC 40 are up around 2% and 3% respectively, they too are still underperforming the S&P 500 Index.