We’ve seen weak performance from U.S. large-cap tech companies this year, but based on their stock market value, these companies still dominate the U.S. market. Peter and Jonathan discuss whether we should be concerned about concentration risk or if having a top-heavy market is a common phenomenon. Plus, hear why you might consider contributing to a Roth IRA for your working child.
Hosted by Creative Planning’s Director of Financial Education, Jonathan Clements, and President, Peter Mallouk, this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!
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Transcript:
Jonathan Clements: This is Jonathan Clements, Director of Financial Education for Creative Planning. I’m talking today with Peter Mallouk, President of the firm, and we are Down the Middle.
As always, all eyes are glued to the stock and bond market as investors look to gauge the impact of tariffs, changing tax policy, inflation and more. Where do you go from here? Peter, we’ve seen weak performance this year in U.S. large cap tech companies, but based on their stock market value, these companies still dominate the U.S. market. Indeed, much of the U.S. market’s return over the past five years has come from the so-called Magnificent 7. Is this concentration risk something we should worry about, or is this sort of top-heavy market a common phenomenon?
Peter Mallouk: You know, it’s really interesting, Jonathan. You see a lot of warning signs where people say, well, so much of the return is coming from just one stock or the Magnificent 7 or ten stocks. Nvidia now, we didn’t have a trillion-dollar company a few years ago, and now Nvidia is a $4 trillion company, makes up 8% of the S&P 500. If you go throw your money in the S&P 500, you own the 500 biggest companies in America, 8% of that is in one company. That one company’s market cap is bigger than all of China’s market cap, bigger than most countries’ GDPs, and this is just one company. You get to the Magnificent 7, you’re now to about a third of the market, and you get the top 10 stocks in S&P 500, you’re closing in now on 40%, 50% of the S&P 500. So concentrated risk is normal. We normally have high-flyers that lift the index.
This is why John Bogle, the founder of Vanguard, said, “Don’t look for the needle in the haystack. Buy the haystack, and you get the rocket ship.” And traditionally, it hasn’t always been tech companies. There were times where it was GE or Monster Energy or Southwest Airlines, where you buy the S&P 500, and of course, if you own these 500 companies, you will have whatever the 1, 4, 5, 6 that are going to absolutely go nuts and do incredible, and they lift up the returns. And so when you get good returns across the index over a long period of time, a disproportionate amount always historically have come from just a few stocks. So that part is normal.
What is unique is the proportion now is unprecedented. So having so much of the return come from so few stocks, that is new. And I think what we’re seeing is not really a stock market deal, we’re really seeing an economy deal. And you have the internet revolution, the tech revolution, and the winners of that revolution, you know, Google, Facebook, Microsoft, Nvidia and so on. These companies became the biggest companies in the world. Well, now we’re in the middle of another revolution starting 25 years later, the AI revolution. Well, there are some new players in the AI revolution, and you know Nvidia is now a whole new deal. But the other winners in the space are the previous winners: Google, Apple, Microsoft, these are the people leading the AI revolution.
So we see these trillion-dollar companies now also investing in what the future is. And all these companies that are leading in this space happen to be large companies. They happen to be in the United States, and they happen to be the companies that could afford to invest hundreds of billions of dollars in the AI revolution, because they made those trillions of dollars in the tech revolution.
Historically, it’s normal to have the concentrated risk. There’s an explanation for why it is the way it is today. And yeah, of course, if some of these stocks get hit very hard, it’s going to negatively impact the index. But over the long run, I’m not concerned about it for the individual investor, because you want to have those 500. We don’t know what the next Nvidia necessarily is going to be. You own the index, you’re going to get it.
Jonathan: Yeah, I mean, that’s the way it’s always been, we’ve always got the bulk of our returns from a very small number of stocks. We just don’t know what those stocks are going to be, which is why you have to diversify. If you don’t diversify, it could be that you miss out on that 4% or 5% of stocks that are driving the market higher.
Peter: That’s right.
Jonathan: So today, Peter, there’s been much hammering about U.S. stock market valuations. Meanwhile, foreign shares are far cheaper. Should that sway investors’ asset allocation? After all, history tells us that valuation differences matter to long-term returns but don’t drive short-term performance.
Peter: You know, it’s interesting because we know from 2000 to 2010, the S&P 500 large U.S. stocks earned 0%. Everywhere else in the world did amazing, whether it was bonds, real estate, emerging markets, international, Asia, Pacific, didn’t matter. And then we had from 2010 to 2025, U.S. stocks just killed everything — absolutely outperformed international, emerging market, everything else.
Well, the beginning of this year, international started to outperform the .U.S, actually with a gap that has not been seen before. International’s outperformance was so significant. I started to have so many clients say, “Should I sell all my U.S. stocks and buy all international stocks? Is this going to be a great rotation?” And then you still have people that say, “Well, why am I invested anywhere in the world but the U.S.? The Europe’s burdened with regulations, the demographics in Asia might not be positive, the AI revolutions in the U.S., maybe everything should be in the U.S.”
And the answer is obviously, just like very, very high net worth households manage their money, you should be everywhere, you should be diversified. And the only question should be what the proportions should be. Even with the huge run-up overseas, international stocks are still, to your point, Jonathan, much better valued than U.S. stocks. The dividend yield is higher with international stocks. You own a stock, you get paid more to own it, and the P/E ratio is still significantly lower than U.S. stocks.
Now, I think there are structural reasons for that. I mean, in Europe, there’s more regulation, there’s more socialism, there are more problems that they’re facing, some of which may be existential compared to the United States, which has its own set of problems, but maybe not economically as challenging. So I think there’s a reason they’re valued differently. And a smart investor is doing what very, very affluent investors do, which is not putting all your eggs in one basket.
Jonathan: Okay, so let’s leave the stock market behind and turn to the bond market. Based on the yield difference between 10-year treasury notes and 10-year inflation index treasuries, investors are collectively expecting inflation over the next 10 years of 2.4% versus 2.2% just three months ago. Despite these rising inflation expectations, the White House is pushing the Federal Reserve to spur the economy by cutting short-term rates, which could further exacerbate inflation. Peter, how do you think this plays out?
Peter: Watching the dialogue between Trump and Powell is, I mean, it’s just hysterical, because Trump’s argument is, “Hey, the economy is amazing, everything’s amazing,” and then he is telling Powell to lower rates. And I mean, everyone knows and agrees, it’s not a political thing, it’s just basic economics. You lower rates if the economy is weak and you have to stimulate things. You cannot say, “the economy is amazing and we really need you to lower rates”. If the economy is really amazing, it means it’s getting too hot, unemployment is actually too low, inflation’s high, housing’s on fire, and you have to raise rates to start to contain that and tamper that. You lower rates when you need to lift an economy up. Well, we have very low unemployment, we’re in the middle of the AI revolution, corporate earnings are very good. Obviously we’re not in a weak economy. It’s not as on fire as it was a year and a half ago. There’s no question about that.
The overhang of COVID and all the money flooding into the system and everybody buying everything everywhere. We’re finally on the tail end of that. I think you even see a housing issue where the reason you don’t see a collapse in prices is no one can sell their home because no one wants to get out of their 2.5% mortgage. So the housing market for the first time in American history is literally frozen, you really can’t tell what real supply and demand is. No one’s willing to move.
It’s interesting, the market thinks that rates are going to drop, which implies that the bond market, which is much smarter than the stock market generally in terms of predicting things, the bond market believes the economy is going to soften from here.
Now, we do know that when you look at professional economists and you poll them on where rates are going to go, they’re actually wrong significantly more than they’re right. So it’s not even a 50/50. You take the most educated people in the country on this topic that work at the Federal Reserve and you poll them, and this is polls gone back for decades, and they’re usually substantially wrong. So I don’t know where interest rates are going to go, nobody knows where they’re going to go, but the bond market believes that things actually look mildly negative going forward.
Jonathan: Peter, one thing when we’ve had this discussion before about the Fed cutting rates was that it goes to the issue of government borrowing costs. Do you think that’s a factor today?
Peter: Yes, I think you’ve nailed what one of the things President Trump is very focused on, which is Biden and Trump both broke records for adding to the deficit. No matter what side of the aisle you’re on, your leader is a disaster when it comes to the federal deficit. And what Trump wants to do is, as those bonds come due, he wants to, just like a homeowner wants to switch to a lower mortgage, he would love to take bonds that he’s paying 4.5% on and switch them to bonds where the government is paying less than 4% on. And so he would love lower rates, as it would help him contain the deficit a little bit more, and it would also add fuel to the fire in the economy. I’m not sure Powell’s going to cooperate here. It’s going to be interesting to see where it goes.
Jonathan: But of course, Powell can’t cut longer term rates, right. He can only influence short-term rates without quantitative easing, which is, I think, a path we don’t want to go down again. Longer term rates are at the behest of investors rather than the behest of the Federal Reserve.
Peter: That’s right. But the Federal Reserve anchors things a little bit with the direction that they send things, but ultimately the weighing machine will decide what they really believe will happen in the long run.
Jonathan: All right, Peter, so now it’s time for the tip of the month. What have you got for us this month?
Peter: For my tip of the month, I would say if you’ve got kids that are working, and they’ve earned a few thousand dollars, and they’re using that for school or something else, you could open up a Roth IRA for them, and you can contribute on their behalf up to the amount they earned up to the Roth IRA limit. It’s a great way for them to get an account that’s growing tax-free, and they’re contributing to it at a very young age for them and gives them a great education about money and a little bit of a head start. How about you, Jonathan?
Jonathan: So Peter, you might remember a number of years ago you had a Creative client conference in San Diego, and the head of cybersecurity for Fidelity was there, and he offered this tip, which I thought was a great tip, which was to access your financial accounts from a cheap notebook computer that you don’t use for anything else, you don’t use it to check email, you don’t use it to surf the web, you just use it solely to look at your financial accounts. And that way you reduce the risk that you end up with malware on your computer where your usernames and passwords could be stolen.
I mean, I see this happening all the time, particularly among older investors. They get an email, they panic, they click on the link, and the next thing, you know, all hell breaks loose. So for a few hundred dollars, get a cheap notebook computer, use it to access your financial accounts, and don’t use it for anything else, and then you’ll be safer.
Peter: I love that tip. We had to build a whole team now to confirm every transaction, because fraud is so prevalent — they probably intercept or block people from stealing from our clients who have hacked their computers multiple times a week, every week. It’s becoming very, very commonplace.
Jonathan: It’s scary out there, it’s very scary. Alright, Peter, great talking to you. This is Jonathan Clements, Director of Financial Education for Creative Planning. I’ve been talking to Peter Mallouk, President of the firm, and we are Down the Middle.
Disclosure: This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels.
