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Concentration a key risk as 2025 gets underway, Barclays warns

by January 8, 2025
written by January 8, 2025

Investing.com — Market concentration remains a key risk as 2025 gets underway, Barclays (LON:BARC) strategists cautioned in a Wednesday note.

“The continued dominance of mega-cap Tech means that a sustainable broadening of US equity upside remains elusive,” strategists led by Venu Krishna noted.

By October, the percentage of S&P 500 companies outperforming the index reached its highest point in over a year. However, this figure dropped significantly in the last two months of 2024, driven by steep declines in the Materials and Healthcare sectors.

The Barclays’ US Broadening basket, which tracks a more diversified group of stocks, mirrored this pattern, reaching its peak year-to-date returns in October before relinquishing some gains towards the year’s end. In contrast, Big Tech companies continued their ascent, maintaining the S&P 500’s top-heavy performance profile from the previous year, albeit slightly less concentrated.

In 2024, the top 10 stocks in the S&P 500 hovered around record weights, contributing disproportionately to the index’s overall earnings per share (EPS).

According to Barclays’ note, Big Tech’s share of the S&P 500 by weight is now 29.3%, with these companies accounting for half of the index’s gains last year, a slight decrease from 56% in 2023.

Chip giant Nvidia (NASDAQ:NVDA) alone was responsible for 5.4% of the S&P 500 returns in 2024.

The Technology, Media, and Telecom (BCBA:TECO2m) (TMT) and Financial sectors outperformed in terms of EPS, delivering stronger earnings results than anticipated at the start of 2024.

Despite expectations for Big Tech EPS growth to slow down, these six mega-cap companies accounted for at least half of the S&P 500’s price and EPS growth for two consecutive years.

“Concentration remains a key risk as 2025 gets underway,” strategists emphasized.

Still, they point out that the earnings upside in TMT and Financials in 2024 was less reliant on multiple expansion compared to other sectors, such as Utilities, Industrials, and Staples.

The Healthcare sector, despite moderate earnings growth, saw valuation compression. “This is a key element of our recently upgraded outlook for the sector,” strategists said.

As 2025 begins, most sector multiples appear stretched relative to their 10-year valuation ranges, with Financials and Tech trading near their highest valuations of the past decade.

This post appeared first on investing.com
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