Global stock markets have become more concentrated—but not in every way.
In recent years, a few high-profile technology companies have dominated the returns of both US and global stock indices.
Mega-cap companies in the “Magnificent Seven” (Apple, Tesla, Nvidia, Microsoft, Alphabet, Meta and Amazon) now account for a much bigger share of equity indices than they did in the past.
How concentrated is the global equity market in these stocks? One useful way to answer this question is to use a measure called the effective number of stocks (“effective N”).
Effective N answers a simple question: how many stocks would we need in an equally weighted index for it to feel as concentrated as the index we are looking at?
For example, the capitalisation-weighted FTSE Developed Index, which contains more than 2,000 stocks, had an effective N of over 400 in 2013–2014, but its effective N is only around 100 now.
That means that in 2013–2014, the FTSE Developed Index was as diversified as an index of 400 equally weighted stocks, while today it is only as diversified as an index of 100 equally weighted stocks.
Conceptually, if around 400 stocks were driving the FTSE Developed Index’s returns in 2013–2014, only around 100 are doing so now.
But we can use the effective N calculation to look at concentration in other ways too. And a fundamental perspective tells a very different story.
For example, measures linked to the underlying scale of corporate activity, particularly book value, sales and cash flow, remain remarkably diversified. The effective N for both metrics continues to sit near 350–400, only modestly below levels observed two decades ago.
While investors have become willing to pay increasingly large premiums for a small subset of firms, the underlying fundamentals remain broadly distributed across the market.
Interestingly, dividend concentration has moved in the opposite direction of market capitalisation and is now spread more evenly across companies.
Debt concentration has also declined, with the low or zero interest rates that followed the global financial crisis allowing companies to borrow more cheaply. However, this trend has started to reverse slightly during the recent rate-hiking cycle.
Perhaps the most striking trend, however, is in liquidity. Liquidity, measured by median daily traded value (MDTV), has shown an even sharper decline in effective N than market capitalisation.
In other words, trading activity has become heavily concentrated, with investors increasingly directing flows toward the largest and most visible companies.
This disconnect likely suggests that the current period of heavy market concentration is primarily the outcome of investor behaviour, rather than a reflection of companies’ real economic footprint.
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