However, in contrast to 2023, their returns varied significantly in 2024, ranging from 13% for Microsoft to 171% for NVIDIA. Furthermore, Broadcom, an artificial intelligence chip maker, joined the USD 1 trillion market cap club in December 2024, leading some market participants to call the term Magnificent Seven dead and coin the acronym BATMMAAN.1
The acronym BATMMAAN represents the eight largest stocks of the MSCI World Index as of December 2024, namely Broadcom, Apple, Tesla, Microsoft, Meta Platforms, Amazon.com, Alphabet, and Nvidia. While the MSCI World Index comprises 1,395 stocks, these eight stocks make up just over 25% of the total index.
This narrow market raises crucial questions about market diversification. One way to assess market concentration is through ‘effective N,’ a metric that compares the balance between portfolios with diverse weights versus those that are highly skewed. For instance, in a portfolio of 100 stocks with equal weights, the effective N would be 100. In contrast, if a single stock dominated 99.9% of a 100-stock portfolio, the effective N would be closer to 1.
Figure 1 | Markets get more and more concentrated
Source: Robeco, Refinitiv. The figure shows the effective N (left axis) and the ratio of the effective N relative to the total number of constituents (right axis) for the MSCI World Index over time. Effective N is calculated as the inverse of the Herfindahl-Hirschman Index (HHI) for portfolio weights, where HHI is the sum of the squared stock weights.
The sample period is December 2000 to December 2024.
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Figure 1 visualizes the effective N as well as the effective N relative to the number of all constituents for the MSCI World over time. For many years, the effective N hovered between 300 and 400, but since 2018 has steadily declined, falling below 100 for the first time at the end of December 2024. Consequently, the effective N is now less than 7% of the total number of index constituents, indicating a significant concentration.
This trend suggests that investing in value-weighted broad market indices such as the MSCI World Index may not offer the diversification one might assume based on the sheer number of constituents. Given that the dominant stocks are all US-based, tech-focused, and carry high valuations, they inherently share similar risks.
The plunge of US semiconductors such as NVIDIA and Broadcom on Monday, 29 January 2025, is a stark reminder of such concentration risks. The sell-off was triggered by the release of the latest version of DeepSeek, a ChatGPT alternative developed by a Chinese startup that seemingly achieves comparable performance at a fraction of the price and runs on less-advanced chips, raising questions about the US’s technological dominance.2
Recent research also indicates that smaller stocks outperform larger stocks after times of high market concentration.3 Therefore, investors may want to consider diversifying their investments by exploring opportunities in international markets, small-cap stocks, and active investment strategies that can deviate from capitalization weight.
Footnotes
1 Crowther, D., December 2024, “The Magnificent 7 is dead! Long live the BATMMAAN stocks”, Sherwood News.
2 Serafino P., and Hajric V., January 2025, “DeepSeek Is a Blow to the Case for Buying Big US Tech”, Bloomberg.
3 Emery, L., and Koëter, J., September 2024, “The Size Premium in a Granular Economy”, SSRN Working Paper No. 4597933.
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