Insights from Past Concentrated Rallies and Thematic Opportunities
- The rally in global equities in the first half of 2023 was highly concentrated, with 10 stocks producing 53% of the MSCI ACWI Index's return.
- The factors that drove the top 10 return contributors in 2023 — quality, volatility and reversal in analyst sentiment — differed from those that generated outsized performance in previous years' concentrated rallies.
- Thematic investing related to structural megatrends, such as the blockchain economy, robotics and space exploration, helped drive the recent rally in which more than 50% of constituents outperformed the MSCI ACWI IMI Index.
In 2023, concentration in the MSCI ACWI Index reached its highest level since 1999
"Weight in Index" is the maximum aggregate weight of the top 10 constituents by market capitalization in the MSCI AWI Index each year. Data is from Dec. 31, 1998, to June 30, 2023.
Factor exposures differed across past concentrated rallies
We compare the current equity rally with periods in the past when top 10 contributors had an oversized contribution to the index's return. During the tech bubble of 1999, the top 10 return contributors to the MSCI ACWI Index accounted for 32% of the index's return, whereas during the COVID-19-related rallies of 2020 and 2021, the top 10 contributors accounted for 46% and 31% of return, respectively. Beyond a shared large-cap bias, an analysis of the factor exposures of the top contributors revealed key differences across each of the four periods.
In 2023, the top return contributors had high exposures to quality and volatility, with volatility driven by beta and, to a lesser extent, residual volatility. In the other three periods, the top 10 return contributors had similar levels of momentum exposure. The top contributors in the 2020 rally had high growth exposure and in the 2021 rally high quality exposure. The top contributors during the tech bubble had high exposures to volatility driven by beta.
Top 10 return contributors in 2023 have had high exposures to quality and volatility
The heat map shows the average month-end factor exposures (Z-score) of the top 10 contributors to the MSCI ACWI Index during the time periods shown. For year-to-date 2023, data is as of June 30, 2023.
We also looked at the top 10 contributors through the lens of their exposures to the MSCI analyst-sentiment factor.3 Year to date through June 30, 2023, analyst sentiment shifted to positive from negative. In comparison, the other three rallies we considered had unidirectional and flat exposures throughout the respective year. Equity markets are forward-looking, and stock prices are driven by their future earnings potential, so a positive shift in analyst sentiment could explain some of the exuberance in the outperformance of the top contributors.
Analyst sentiment for top 10 contributors improved in 2023 but was relatively flat in past periods of high concentration
Did this year's thematic rally extend beyond mega caps?
We observed previously that one impetus for the equity-market rally in the first half of 2023 may have been investors' positive expectations about the future earnings potential of the rally's top-performance-contributing stocks due to their exposure to structural megatrends. We were curious to know if the theme impacted stocks more broadly, beyond the mega caps that led the index. Our analysis showed that more than 50% of stocks with a high association with themes such as the blockchain economy, robotics and space exploration outperformed the MSCI ACWI Investable Market Index (IMI) through June 30, 2023.4 Investors may have picked stocks in these themes due to their potential association with AI. By comparison, 65% of index constituents underperformed the index over the same period.
In 2023, megatrends propelled outperformance v. the MSCI ACWI IMI Index
Data as of June 30, 2023.
Déjà vu in 2023? It's doubtful
The recent rally may share similarities with past concentrated rallies, but we found notable differences as well. The top 10 return contributors in the first half of 2023 had different factor exposures and analyst sentiment indicators than earlier rallies. Also unique to this year, stocks with exposures to long-term structural trends, particularly transformative technology, experienced broad-based outperformance. And although the top 10 contributors' share of the MSCI ACWI Index's return fell to 45% in July from 53% in June, global equity markets remain concentrated. Our research shows that market-leading firms — such as those furthering the concentration — have often struggled to keep up with the broad market over time.
Further Reading
1Returns in gross USD.2Using average monthly data from January through June 2023.3Exposure to the analyst-sentiment factor is measured using month-end average values of the change in analyst-predicted earnings per share for the top 10 contributors in that year in the MSCI ACWI Index.4Association is measured by a relevance score expressed as a number between 0% and 100% that denotes the strength of the economic association between a company and a theme. Relevance scores used in our analysis are exposures as of the beginning of 2023 above a threshold of 0.25.
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