Key Points
In any market environment, investors can typically identify a small group of stocks that drive nearly all the gains in major indexes such as the S&P 500 (SNPINDEX: ^GSPC) and the Nasdaq Composite (NASDAQINDEX: ^IXIC).
A study published this year found that just 46 of more than 29,000 publicly traded companies accounted for half of the stock market’s wealth creation over the last century. Meanwhile, the median return across the entire stock universe — which generated an aggregate total return of 30,000% — was negative 6.9%.
But the current bull market may be even narrower than usual. In fact, the stock market is repeating a pattern not seen since the late 1990s, and it could signal a significant shift ahead.
Here’s what’s happening and how investors might adjust their portfolios if history repeats itself.
Image source: Getty Images.
Not all stocks have been rising in this bull market
Stocks generally move higher and lower as a group. Some outperform the market, some underperform, but most trend in the same direction. Growth stocks, for instance, might rise more than average on up days but fall harder on down days.
The degree to which a stock moves relative to the market is known as beta. A beta above 1 indicates wider swings than the market; between 0 and 1 means more muted movement; below 0 means the stock moves in the opposite direction.
“It is exceptionally rare to have stocks with negative betas,” Janus Henderson’s Richard Bernstein recently noted. “The market’s recent narrow leadership, however, has left a near-record number of companies with negative betas.”
Around 70 S&P 500 members have posted negative monthly beta over the last 36 months. While big AI stocks have delivered extraordinary returns, others have seen their prices collapse. The last time such a high percentage of S&P 500 companies exhibited negative beta was during the height of the dot-com bubble.
Here’s what happened last time
There was indeed a spike in negative-beta stocks heading into the dot-com bubble, but the peak didn’t arrive until after the bubble burst and internet stocks began declining. A flight to safety drove dozens of stocks higher as investors sold off the internet names that had propelled the market for the prior half-decade.
Unfortunately, there’s no guarantee that stocks exhibiting negative beta now will maintain that characteristic once a downturn arrives. This presents two challenges for investors. First, we don’t know if or when a correction will occur. Second, we can’t reliably predict which stocks will behave differently when it does.
Diversifying across individual stocks can help mitigate single-company risk, but simply purchasing negative-beta large-cap domestic stocks today is unlikely to provide meaningful protection against future market downturns. The data merely points to a very narrow bull market dependent on continued growth from a handful of companies. For genuine diversification, investors should consider other asset classes or look beyond U.S.-based large-cap stocks.
Investors seeking downside protection within their equity holdings should consider quality or value stocks. Several value-oriented ETFs typically exhibit lower positive beta. Quality stocks tend to capture most of the upside during bull markets while declining less during bear markets. There’s often significant overlap between quality and value stocks, so be careful not to over-concentrate.
There are no guaranteed winners in the stock market. If the bull market continues to advance, led by just a handful of companies, diversifying away from those names will necessarily result in lower total returns. But that trade-off may be worthwhile if it provides greater peace of mind.
