Partner Insight: Your Questions Answered by Amundi

The numbers speak for themselves: over the past five years, the MSCI USA Mega Cap Select Index has delivered an impressive annualised performance of 18%, far outpacing the broader MSCI USA Index at 15%.

Managing mega-cap dominance in a portfolio

Mega-cap stocks have driven recent market gains, but their dominance has introduced risks such as portfolio concentration and elevated valuations. To address this, investors can combine different indices to manage their exposure.

The mega caps have dominated stock market indices for much of the past decade. This has been true across most global markets, but has been particularly evident in the US, where technology giants such as Apple, Microsoft and Alphabet have driven market returns through innovation and strong earnings performance.¹

For investors, these US mega cap stocks have delivered extraordinary growth.²  Apple was the first to surpass a $3 trillion market valuation, briefly in 2022, and then again in 2023³,⁴ . Chipmaker Nvidia now has a market capitalisation above $3 trillion, as does Microsoft⁵. Alphabet and Amazon are smaller, but still command market capitalisations of around $2 trillion. A company needs a market cap of $200bn to be designated as a mega-cap⁶.

The rise of these mega cap stocks⁷ has fundamentally reshaped the US equity market. It has created a more concentrated market, with a greater focus on specific sectors, notably technology. These giants offer significant growth potential – and have delivered strong returns for investors - but also come with concentration risks that investors must manage carefully.

By allocating investments between the MSCI USA Mega Cap Select Index and the MSCI USA Ex Mega Cap Select Index, investors can manage their portfolio more strategically, balancing the benefits of exposure to market leaders with the diversification⁸ needed to mitigate risk.

Mega cap performance

The numbers speak for themselves: over the past five years, the MSCI USA Mega Cap Select Index has delivered an impressive annualised performance of 18%, far outpacing the broader MSCI USA Index at 15%.⁹ This remarkable performance has solidified the dominance of mega caps in the market, but it should also give investors pause for thought. 

Mega-cap stocks, while undeniably successful, can pose risks to investors due to their outsized influence on market-cap-weighted indices. These indices have become increasingly concentrated in a few dominant companies, and just one or two sectors. 

While their dominance has looked unassailable, there are reasons for concern. Valuations are high, for example. The MSCI USA Mega Cap Select Index, for example, trades at an average price-to-earnings (P/E) ratio of 32x, compared to 23.6x for the broader market, as measured by the MSCI USA Index.⁹ While these high valuation levels reflect strong growth prospects and investor confidence, they also make these stocks more vulnerable to market corrections.

The case for Mega Cap exposure

Despite their high price, there is still a compelling case to hold mega caps in a well-balanced portfolio. These companies are often leaders in innovation and hold dominant positions in crucial sectors such as technology, healthcare, and e-commerce. They generally have strong balance sheets, diversified businesses and, as such, are often better positioned to withstand economic downturns. They are also exposed to significant growth trends such as digitalisation, artificial intelligence, and renewable energy.

Striking a balance: Diversifying beyond Mega Cap dominance

However, investors need to manage the concentration and valuation risks associated with mega-caps. With this in mind, allocating to the MSCI USA Ex Mega Cap Index can provide diversification⁸ benefits by incorporating exposure to mid-cap and smaller large-cap companies. Investing in this part of the market may help mitigate sector-specific risks and reduce volatility, such as high exposure to the technology sector. It may also help investors tap into the differentiated growth opportunities found in smaller, more agile companies.

Non-mega cap stocks often trade at more attractive valuations.³ These lower valuations could provide a margin of safety for investors, reducing the risk of overpaying for future earnings. 

The debate between concentration and diversification⁸ lies at the heart of investment strategy. When it comes to mega cap and non-mega cap stocks, the decision ultimately depends on each investor's unique priorities and approach. They need to balance the innovation and market influence of mega cap stocks with the opportunities for diversification and growth available from smaller companies.8 Ultimately, the choice depends on individual goals, risk tolerance, and market outlook. Each investor must craft their allocation strategy thoughtfully, aligning it with their convictions and adapting it to the evolving equity landscape.

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¹Past performance is not a reliable indicator of future performance.

²Past market trends are not a reliable indicator of future ones.

³https://www.statista.com/chart/14953/apple-market-capitalization/

⁴https://www.forbes.com/sites/dereksaul/2024/10/15/apple-stock-rises-to-all-time-high-and-record-36-trillion-market-cap/

⁵https://www.investopedia.com/biggest-companies-in-the-world-by-market-cap-5212784

⁶https://www.investopedia.com/terms/m/megacap.asp

⁷Mega Cap stocks are defined as companies with market capitalisations in excess of $200 billion.

⁸Diversification does not guarantee a profit or protect against a loss.

⁹Source: Bloomberg, MSCI, Amundi, Data as at 31/10/2024. Past performance is not indicative of future returns.

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Past performance is not a guarantee or indication of future results.

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