ORLANDO, Florida, June 12 (Reuters) - U.S. equity market

concentration is, by some measures, now the strongest ever,

raising justifiable concerns that having the entire market's

fate in the hands of so few stocks will only end in tears.

The current environment highlights a lack of diversification

and risk-spreading options, fuels bubble speculation, and makes

it difficult for active and even passive managers to beat the

benchmark index when the juggernaut is being driven by literally

a handful of stocks.

But it's not necessarily an accident waiting to happen.

From a global historical perspective Wall Street's dynamics

today are not without precedent, average returns tend to be

higher when concentration is rising rather than falling, and the

ongoing tech-led boom is supported by strong fundamentals.

These are the conclusions, amongst others, in a deep-dive

analysis into market concentration published last week by

Michael J. Mauboussin and Dan Callahan at Morgan Stanley

Investment Management.

Remarkable as it may seem, at the end of last year the U.S.

equity market was nowhere near the most concentrated among

leading global equity markets.

Out of a dozen of the world's largest, the U.S. market was

the fourth least concentrated, with the top 10 U.S. stocks

accounting for almost 30% of national market cap. Only India,

Japan and China were less concentrated, by that measure, while

concentration was most extreme in Switzerland, France and

Australia.

America's position in that list will have changed since, in

light of the ongoing artificial intelligence and tech boom,

particularly in Nvidia ( NVDA ) shares. Analysts say the top 10 stocks

now account for a record 35% of U.S. market cap.

But it does put the current U.S. picture into a wider

context.

Mauboussin and Callahan note a 2020 study that found that,

across 47 equity markets around the world between 1989 and 2011,

the average weighting of the top 10 stocks was 48%. That paper

was by no means singing the praises of narrow markets, but

again, it puts the current frenzy over Wall Street's narrowness

into a less alarming historical context.

"The U.S. stock market, even after a decade of increasing

concentration, remains one of the more diversified markets in

the world," Mauboussin and Callahan wrote.

Of course, the top one, three or 10 U.S. stocks matter much

more for the world than the equivalent issues anywhere else -

the market cap of U.S. stocks last year was around 60% of global

equity market cap, and is no doubt even higher now.

FEATURE, NOT A BUG

Of all the eye-popping statistics currently being bandied

around about the scale of market concentration, Howard

Silverblatt, senior index analyst at S&P Dow Jones Indices,

provides perhaps the most remarkable.

He notes that the top three U.S. companies Apple ( AAPL ), Nvidia ( NVDA ) and

Microsoft account for 10.6% of global market cap.

But is that strength justified? It might well be.

Mauboussin and Callahan estimate that in the decade from

2014 to 2023, the top 10 U.S. stocks' market cap averaged 19%

but their share of overall U.S. earnings was 47%. Last year,

their market cap and share of overall profits rose to 27% and

69%, respectively.

Silverblatt calculates that Nvidia ( NVDA ), whose shares are up more

than 140% this year, accounts for a third of the S&P 500's

entire total returns of 13% year to date.

"Concentration is extremely high now, unusually high. But

when these companies are doing well, you're a happy camper," he

says.

Indeed, Mauboussin and Callahan find that since 1950, the

S&P 500 has delivered above-average returns in periods when

concentration was rising and below-average returns when

concentration was falling.

The results surrounding the late 1990s dotcom boom and 2000

bust may be particularly resonant given the tech-centric nature

of today's market concentration - compound annual returns in the

1994-1999 years were 23.5%, and just 3.6% from 2000 to 2013.

Admittedly, that latter period includes the Great Financial

Crisis, but it is an insight into what can happen when

concentration in a tech-heavy market dissipates. Be careful what

you wish for?

While the current concentration of wealth, earnings and

market cap in the hands of so few stocks is unprecedented by

many measures, increased concentration appears to be a feature

of the U.S. stock market, not a bug.

A study last year titled 'Shareholder Wealth Enhancement,

1926 to 2022' by Hendrik Bessembinder, professor of finance at

Arizona State University, showed that the trend of increasing

concentration has been in place for decades.

What's more, in the internet-based economy that has created

more 'winner take all' outcomes, it is increasing.

Bessembinder finds that investments in publicly listed U.S.

stocks enhanced shareholder wealth (SWC) by more than $55

trillion in aggregate from 1926 to 2022 even as investments in

more than half - 58.6% of the 28,114 individual stocks -

reduced shareholder wealth.

The Top 11 firms account for slightly over 20% of net SWC,

the top 23 firms account for just over 30%, and the top 42 firms

account for just over 40%.

The number of companies that account for half of total net

wealth creation since 1926 decreased from 90 in 2016, to 83 in

2019, and to 72 as of 2022, Bessembinder notes.

"It can be anticipated that shareholder wealth creation is

likely to be concentrated in a relatively few firms during

future decades as well," he concludes.

(The opinions expressed here are those of the author, a

columnist for Reuters.)