Market concentration at records: Will easing Iran tensions spark rotation?

Investing.com -- U.S. equity market concentration has surpassed previous historical peaks, with the top five and top 25 companies now accounting for approximately 30% and 53% of the overall market, respectively, according to Wolfe Research.

This exceeds even the elevated levels seen in the 1960s, the firm said in a note to clients on Friday.

Analyst Chris Senyek told investors the narrow rally off the March 30 low in the S&P 500 at 6,343 has been driven heavily by artificial intelligence-linked names, noting that almost half of the companies leading the rebound are leveraged to the AI theme "that has come back to dominate markets."

The key question, Senyek said, is whether that concentration persists once a U.S.-Iran resolution is reached.

Wolfe Research’s view is that a peace deal could spark a short-term broadening, as falling oil prices and bond yields lift beaten-down parts of the market. However, the firm does not expect the rotation to last.

"Our sense is that a peace deal could spark a short-term broadening out in markets, as oil prices and bond yields fall; however, we believe that ultimately investors will shift back to the AI theme to drive the market," Senyek wrote, citing "the outsized earnings growth and relatively attractive valuations exhibited by these companies."

While a Hormuz resolution may offer temporary relief to lagging sectors, Wolfe Research sees the structural dominance of AI-linked mega-caps as the primary driver of U.S. equity performance in the months ahead.

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