Morning market minute: The rising concentration risk in equities

REAL ECONOMY BLOG | February 07, 2025

Authored by RSM US LLP

For the first time since the dot.com bust in 2001, the difference between the equity earnings yield on the forward-looking S&P 500 less the yield on the 10-year Treasury has declined into negative terrain.

This is a function of the concentration in the largest technology names inside the S&P 500 and is a risk that may grow along with the uncertainty caused by policy shifts of the federal government.

In our economic forecast for this year we indicated that froth in financial markets is one of the risks to the economic outlook this year.

That is because of the exposure of the upper two quintile of income earners to equity valuations.

That cohort is responsible for over 60% of all consumption—think of that robust 4.2% increase in U.S. household spending in the fourth quarter and what is driving it.

A sustained decline across domestic equity markets in general and a drop in technology valuations in particular would almost certainly cause a pullback in household spending.

Given the increase in policy uncertainty and the clear link of that to volatility across asset classes, this is something that demands close attention.