Investment Market Observations: Concentration & Valuation

by Kevin Kroskey, CFP®, MBA

Markets are funny. After all, they’re comprised of people who themselves do funny, nonsensical things from time to time.

In 2023, tech stocks have come out of their 2022 shellacking and have again been soaring. Questions swirl. Can the outperformance be sustained? Is artificial intelligence (AI) a boom that will justify high prices? Or is AI (and tech stocks more broadly) rhyming with the internet explosion and subsequent bust of the 2000–2002 period?

Some related, hopefully instructive, observations are below.

Record Concentration

Looking at the S&P 500 this year through September, you see healthy returns of 13.3%. This is at a time when the FED has aggressively raised interest rates. The economy and U.S. consumer have been more resilient than most anyone would have guessed … so far, anyway.

Yet, if you peek under the hood, 7 stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla – have produced nearly all the positive returns of the U.S. stock market. It’s not uncommon to find that selected darlings drive stock returns of the broad-based U.S. market. Yet, through the first three quarters of this year, these 7 stocks have comprised more than 90% of the aggregate S&P 500 index return. Comparatively, looking back over history, the other top two concentration years were 78% (2007) and 59% (2020) for the top 10 stocks. So, 2023 has been a record year by a mile.

If you exclude these 7 stocks and look more broadly beyond the S&P 500 to include small and mid-sized stocks, the U.S. market returned through September is just 3.7%.


Stock market valuations – whether markets are cheap or expensive or something in between – are a frequent topic of conversation among investors for good reason. Valuation ratios tell us the price of stocks relative to fundamentals like earnings, sales, or cashflows. We can then use these ratios to gauge the relative attractiveness of a group of stocks relative to another group of stocks or their own historical norms.

A large body of academic evidence ties valuation levels and expected returns. This is intuitive. A tad simplistic but instructive nonetheless: the cheaper the price paid, the higher the expected return. It’s like the old adage in real estate: “You make your money on the buy.”

In 2023, some interesting valuation dynamics have occurred. Let’s consider the granddaddy of all valuation ratios: price-to-earnings (P/E). At the beginning of the year, the P/E on large-cap stocks was 19.0, while small-value stocks were at 10.5. Since 2000, historical P/E averages are 19.2 for large-cap stocks and 16.9 for small-cap value stocks. So small-value stocks were trading at nearly a 40% discount to their historical valuation and near their absolute low of 9.9 in March 2020. Sounds like a deal?

Well, large caps have outperformed in 2023 through September. The P/E now for large-cap stocks is 23.3 and 21% higher than their 19.0 average, while small-value stocks are 12.7 and still 25% below average.

Most of the price appreciation from large caps has not been from growth in earnings but from investors bidding up prices, paying more for the same dollar of earnings. Perhaps this is the AI-fueled optimism to be justified or just punch-drunk animal spirits. Only time will tell.

Now the “valuation spread” – or difference between valuations of large-cap and small-value stocks – is even greater at the end of September at 10.6 vs. 8.5 to start the year. While small-value stocks may appear to be less of a deal relative to their own history, relative to large-cap stocks, they now appear even more favorable.

This begs the question: should we be surprised by what has transpired this year?

The answer is no. Markets are noisy in the short term with wide-ranging outcomes. Looking out over a 5-10 year horizon, valuation ratios are correlated to realized returns. It’s like a gravitational pull back to a sense of normality over time. Price matters. And the price you pay for a future stream of cash flowing to you matters even more.

It will be interesting to look back five years from today and see what market returns have been. Probability says small-value stocks will do better, and the record concentration we are seeing will not be there. Having the conviction to play these probabilities in your investing process takes discipline, to say the least. It’s easier to follow the herd. Even if it stampedes off a cliff, at least you’ll have company.

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Kevin Kroskey, CFP®, MBA

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Kevin Kroskey, CFP®, MBA is the Founder of True Wealth Design, a wealth management firm with deep expertise in retirement, tax, and investment planning, helping successful families and individuals Plan Smarter and Live BetterTM

Opinions and claims expressed above are those of the author and do not necessarily reflect those of ScripType Publishing.