Historically, the stock market has been a good place for investors to put money. But over the last few years, it’s been a select few shares that have been doing a lot of the heavy lifting.
As a result, around 33% of the S&P 500 is made up of seven stocks. And I think that’s a risk investors should take seriously heading into 2025.
Concentration risk
Optimists about US stocks point out that the companies that dominate the S&P 500 are some of the best businesses in the world. And they’re absolutely right about this.
I don’t think there’s anything intrinsically wrong with having seven stocks take up 33% of a portfolio. But with the US index, a lot of them might be vulnerable to the same risk.
The issue is antitrust. Having come to dominate various industries, the likes of Amazon, Apple, and Meta Platforms have started attracting the attention of regulators.
Investors have tended to ignore this on the grounds that (i) the companies won’t get broken up and (ii) investors will actually be better off if they do. Well, we’re about to test this in 2025.
Alphabet
Earlier this year, the US ruled that Alphabet (NSADAQ:GOOG) was an illegal monopoly. And while investors might have hoped things could be sorted with a fine, it looks a bit more serious.
The Department of Justice has recommended three things, which collectively amount to breaking the company up. They involve selling off Google Chrome and potentially Android.
This would be a big problem for Google, especially its plans in artificial intelligence. And with this looking like a key area in the battle for future search dominance, the risk is significant.
Alphabet plans to appeal the recommendation and a final outcome could be years away. But this looks like a reminder for investors that the antitrust risk is to be taken seriously.
Apple
In light of the recent developments with Google, I think Apple (NASDAQ:AAPL) is worth another look. Like Alphabet, it’s been under antitrust pressure recently.
The Department of Justice alleges that Apple unfairly maintains its competitive position by restricting third-party apps, including digital wallets, messaging systems, and smartphones.
I’m not sure about the intrinsic merits of the case, but my sense is that shareholders ought to take this seriously, especially in light of the latest developments in the situation with Alphabet.
At a price-to-earnings (P/E) ratio of 38, Apple shares are priced for growth. And I think its competitive position is a key part of what justifies this valuation.
Buying shares
Antitrust concerns are now too real to be ignored and affect some of the biggest companies in the world. So the effect on the overall stock market shouldn’t be underestimated.
Over the last few years, investors have seen big tech as a source of safety. In challenging macroeconomic environments, the likes of Alphabet and Apple have held up well.
If that changes in 2025, I think the risk of a stock market crash increases. And that’s something else investors need to bear in mind next year and beyond.
