In their latest Q4 2024 Pzena Market Summary titled – Living In A Concentrated World – Richard Pzena’s firm says Global equity markets have grown increasingly concentrated, driven by U.S. dominance and a few top-performing stocks, particularly since the rise of generative AI in 2022.
This trend has hindered value stocks and active strategies, as expensive stocks have outperformed. However, historical patterns suggest that declining concentration could reverse these dynamics, favoring value stocks and broadening performance opportunities.
Earnings growth of leading companies, like the “Magnificent Seven,” is expected to slow, potentially flattening market concentration. This shift could foster style rotation, with value stocks and active management strategies poised to benefit in a more evenly distributed market environment.
Here’s an excerpt from the commentary:
As the law of large numbers looms, analysts are forecasting earnings growth of the Magnificent Seven to converge with the rest of the market, which may stem the tide of increasing market concentration. Historically, that’s all that really needs to happen for style rotation to occur.
The weight of the largest stocks does not need to reverse—it merely needs to stop going up. Once market concentration growth is relatively flat, value has historically outperformed the market by 460 basis points, beaten value-light strategies by 240 basis points, and outpaced expensive stocks by 370 basis points.
Finally, as market concentration stops rising, equal weight (a proxy for active investing) has historically outperformed cap weight (a proxy for passive investing) by 150 basis points per year, even before market weights began to significantly diversify.
The rise of concentrated performance has had significant implications. Expensive stocks have consistently outperformed cheaper stocks over this period, creating a challenging environment for active managers.
As the earnings growth of these dominant stocks begins to converge with the broader market, the tide may turn, which should benefit value stocks and create a more favorable environment for active investing strategies.
You can read the entire commentary here:
Pzena Q4 2024 Market Commentary – Living in a Concentrated World
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