Money has ruined markets

Football’s boring. The same teams always win:

(Credit: xikia on Reddit; 2025/26 season winners not shown)

Concentration of winners is a widely understood problem. The reward for being good at football is money, so success at the club level becomes entrenched. Teams finishing at the top of the pile can run bigger squads and poach the best talent. Money flows passively up the triangle year after year, which is bad for the majority, most of whose games will matter only to their own fans. And while regime change is possible, it’s usually only brought about by an infusion of external investment or by catastrophic mismanagement.

Stock market concentration causes nearly as many arguments as football. Corporate success breeds success as money flows passively up the triangle, goes one popular theory. The highest-valued companies entrench their lead by poaching the best talent and taking advantage of a lower cost of capital. Regime change is possible, but it’s usually only brought about by an infusion of external investment or by catastrophic mismanagement.

All except one of these points have been done to death. The less considered aspect is what market concentration means for the majority of stocks. One thing it means is that performance matters only to their own fans, writes UBS analyst Sean Burns:

Rising concentration has pushed more market exposure into a narrow group of mega-cap growth stocks, while correlations across the broader universe have fallen toward historically low levels. The result is a market that is narrow at the index level but highly dispersed beneath the surface, making diversified portfolios less able to replicate benchmark behavior.

The Magnificent Seven and Broadcom account for a third by weight of the S&P 500. This small group of tech mega-caps determines index-level returns, while the broader universe of stocks does its own thing. Each share price bakes in that day’s vibes about AI, defence spending, weight-loss drugs, interest rates, Hormuz, etc. In place of a single dominant risk factor pulling the market in a single direction are bifurcations between potential winners and losers across dozens of distinct categories.

Perhaps this sounds like how stock markets always work. It’s not. UBS’s Burns looks at beta, a measure of price volatility relative to the broader market. The chart below shows a recent explosion in the number of stocks exhibiting negative beta, meaning they move inversely to the market:

A stock with a beta of one will move in line with the market. The current beta for the top-eight US stocks is 1.23. The remaining 492 stocks have a beta of just 0.87. For anyone trying to manage a portfolio, in practical terms, this sucks. They can either match the tech mega-caps at their market weight or accept a portfolio that’s defensive by accident. Burns calls it “the unavoidable arithmetic of diversification in an undiversified benchmark”.

Why not compensate by buying some stocks that amplify index performance? Screening the US for betas above 2.5, they’d have a choice of just 23 stocks out of 1000, most of which are involved in racy stuff like semiconductors and crypto. The counterweight would be to sell negative-beta stocks like Walmart, Exxon Mobil, Johnson & Johnson, Costco, Procter & Gamble and Coca-Cola. If the idea is to reduce tech exposure, it won’t work.

Punishment awaits any portfolio that doesn’t look like the index, says UBS. Clever stock picking won’t deliver outperformance like it once did, not just because it’s hard, but because it means allocating cash away from the dominant eight. What’s being penalised is diversification itself.

Contrived jeopardy is how football tries to keep things interesting. Whereas title wins are only for the elite, the also-rans can scrap for cup qualification slots and scramble to avoid relegation. Clubs can rarely slip into mid-table obscurity.

Maybe index setters should try the same trick? Using the English Premier League rules as the proxy, the S&P 500 could eject the bottom 15 per cent of stocks each year. Automatic relegation wouldn’t capture the broad sweep of the asset class or the economy, but, since indices no longer do that effectively, anything is worth trying. The alternative is for a lot of fund managers to go the same way as Wimbledon FC.

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