LIZ ANN SONDERS:  Hi, everyone. I am Liz Ann Sonders, and this is the October Market Snapshot. On today's video, I want to tackle the subject of market leadership, concentration, and the impact of the mega-cap stocks. So let's get started.

[Table for "Cap-weighted indexes vs. index members" for Major indexes and maximum drawdowns is displayed]

Now, at the index level, both the S&P 500 and NASDAQ have pushed to repeated record closes recently, aided again by the artificial intelligence-linked strength, AI strength. Yet beneath the surface, there's remained a tale of two markets. Now, notwithstanding the weak period from mid-February to early April this year, as you can see, index-level maximum drawdowns have been relatively shallow, specifically since the April 8th closing high.

More extreme, and perhaps more instructive, it's what's happened at the average member level. So looking at the entirety of this year so far, while the S&P 500 managed to escape bear market territory by only about 1%, both the NASDAQ and the Russell 2000 did not. However, even for the S&P 500, the average member maximum drawdown did veer into bear market territory, with more extreme bear markets registered by the average member. Key is that these bear market declines happened via a process of rotation within each index, not at the broad index level.

Now, even since the end of the correction on April 8th, there is a stark contrast between index-level maximum drawdowns, which have been limited to the mid-single-digits and average member maximum drawdowns, which are significantly worse. Again, this is due to sharp rotations under the surface of these cap-weighted indexes.

[High/low chart for "Anemia in terms of stocks > new highs" for S&P 500 and NASDAQ % of members with new 52-week highs is displayed]

Another way to understand how concentrated the market has become is to look at the percentage of index members that are trading at new 52-week highs. In the case of the S&P 500, it's currently less than 10%, while it's an even more anemic level for the NASDAQ at just over 5%. In contrast, those ratings were much higher, albeit volatile, during last year's strong market, especially for the S&P 500.

[High/low chart for "A very top-heavy market" for % of S&P 500 by market cap for top 5 and 10 stocks is displayed]

Let's take a look at another way to look at the top heavy nature of today's market environment. With both at record highs by a mile, the 10 largest stocks now represent more than 40% of the S&P 500 by market cap, while the five largest stocks represent more than 25%. Now, these high readings, as you can see, are significantly higher than the prior peaks in 2000 and 2022.

[Table for "Don't confuse contribution with price performance" for 2025 Magnificent 7 performance is displayed]

Let's hone in now more specifically on the Magnificent 7 group of stocks, known as the Mag7 for short. Now, before I get to the details, the moral of this part of the story is that the problem of needing to be heavily concentrated in a small subset of stocks is more of an institutional problem. It's not really an individual investor problem. Institutions, like fund managers, are often benchmarked on a quarterly basis to a cap-weighted index like the S&P 500, and they are indeed at the mercy of the weightings of these stocks, these large stocks, the Mag7 is an example, and it hinders outperformance unless those stocks are weighted similarly within portfolios. But individual investors are not at that mercy, and should understand that although the Mag7 are significant contributors to cap-weighted index performance, that's largely a function of the multiplier of their cap size, not their price performance. Case in point is shown here.

Starting with year-to-date performance, you'll see that only four of the seven Mag7 stocks are outperforming the S&P 500, again, on a year-to-date basis; and those four are all in the top 10 in terms of contribution ranks, but they are not the top price performers in the index; with the best among the seven, Nvidia, not even in the top-40 from a price performance perspective within the S&P 500. And again, that top performer within the Mag7, Nvidia, isn't even in the top-500 from a price performance perspective within the NASDAQ. In other words, there is performance to be had in the stock market outside of those ever-popular group of stocks.

[High/low chart for "Mag7 market cap weight > earnings weight" for Mag7: Market Cap vs. Earnings is displayed]

Now, another risk of concentrating in a cohort like the Mag7 is the fact that their market cap as a percentage of the overall S&P 500's market cap has reached a record high of more than 34%, as you can see in the top field here. On the other hand, their earnings weight within the S&P 500, although also at a record high, is a lesser 27% of the S&P 500's earnings. Now, the spread between the two is shown in the bottom field of this triple chart here. Now, that spread is not yet to the extreme hit in mid-2023, but it is notably rising alongside the market's rally since early April, another thing to be mindful of, especially as we head into earnings season.

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So let's wrap things up. Index level gains only tell part of the market story this year, while a look under the surface yields a backdrop that has been more complex and rotational. The mega-cap stocks have generally done well, with a more anemic share of cap-weighted indexes trading at new highs. But again, individual investors should heed the advice of not falling into the trap of being overly concentrated in a small subset of popular stocks, which has resulted in record top heaviness…especially since groups like the Mag7 are top contributors to performance, but not the best price performers. Finally, as we head into the third quarter earnings season, the pressure is on groups like the Mag7 to continue to post outsized earnings growth, especially given the elevated cap weighting ratio relative to earnings weighting ratio.

So keep that all in the back of your mind as we can go through third quarter earnings reporting season. And thanks, as always, for tuning in. I'll be back next month with another Market Snapshot installment.

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