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Wall Street giants: dominance justified by fundamentals
As March 2025 draws to a close, the world's three largest market capitalizations are dominating with dizzying valuations: Apple is worth $3,280bn, Microsoft follows at $2,910bn, and Nvidia closes the podium at $2,870bn. Between them, these three companies account for 6.82%, 6.05% and 5.99% of the S&P 500 respectively, a dominance that may seem excessive, but is based above all on the strength of their fundamentals.
Recent history confirms that the concentration of stock market heavyweights has continued to intensify. Between 2014 and 2023, the world's ten biggest companies accounted on average for 19% of total market capitalization, while generating 47% of global economic profit. Ten years later, in 2023, they now accounted for 27% of the market and captured 69% of economic profits. A rise that underlines a key fact: these companies dominate not just by their size, but by their ability to generate value.
From a historical perspective, Morgan Stanley has studied the evolution of stock market leaders over the decades. The bank has designed a Total Shareholder Return (TSR) index relative to the S&P 500, applied to the top three market capitalizations. Taking the end of 1950 as the starting point, each stock is assigned an initial index value of 100, adjusted annually according to changes in the relative TSR of the companies holding these positions at the close of the previous financial year. An approach that highlights the long-term dynamics structuring market peaks.
The following chart shows the results:
First in class, last in performance?
Stockmarket history sometimes reserves surprising paradoxes. This is one of them: the top-ranked stock has proved to be a disappointing investment over the long term. Between 1950 and 2023, its average annual return, relative to the S&P 500, was -1.9% in arithmetical terms, while its geometric return fell to -4.3%, a sign of particularly marked volatility. This finding is in line with previous studies on the subject.
Conversely, the runners-up in this ranking fared better. The stock in second place posted an average annual return of 2.6% (0.8% in geometric terms), with more moderate volatility. As for the third-placed stock, it is not to be outdone: an average annual return of 1.6% and a geometric return of 0.3%, with even better stability than the first two.
Focus on challengers rather than the leader?
Another trend emerges from recent data. The three largest capitalizations have outperformed between 2013 and 2023, despite the technology slump of 2022. The leading stock (Apple) recorded an average annual excess return of 15.9% over the S&P 500.
Stockmarket concentration: between caution and opportunity
The rise of large-cap stocks has mechanically reinforced market concentration. A phenomenon which, while reflecting the outperformance of stock market giants, also revives the adage that trees don't grow to the sky. In other words, corporate growth and size are not infinite. Yet the solid fundamentals of today's leaders, combined with the prospects offered by new technologies, notably artificial intelligence, suggest a potential for development that could benefit them disproportionately.
A challenge for active management
Over the past decade, stock market concentration - measured by the share of the market held by a limited number of stocks - has accelerated sharply. This environment complicates the task of active managers, who are often forced to invest in smaller companies than those dominating the indices. History shows that, between 1960 and 2023, only 30% of US mutual funds outperformed their index when concentration increased, compared with 47% when it decreased.
But beyond the challenges for active management, this concentration raises other questions: reduced diversification, the risk of overvaluing the largest stocks, and the impact of massive flows into index funds. All of which, while worrying, remain difficult to quantify precisely.
Where do we go from here?
Until recently, holding the stock of the most highly capitalized company has proved to be a disappointing strategy relative to the market as a whole. By contrast, investing in the second and third largest stocks generated excess returns between 1950 and 2023. However, this was not the case between 2014 and 2023, when the top three companies posted exceptional relative performances (863% for Apple, 902% for Microsoft and 12243% for Nvidia).
Uncertainty remains as to the future of this concentration. The key factor? The ability of the current behemoths to maintain a sustainable competitive edge and pursue growth in a changing environment.
