February 5, 2024
Last year, the broader markets were led by all things AI and the “tantalizing ten” despite bank failures and escalating geopolitical events.
The chart below (h/t Polen Capital) illustrates that 72% of the Russell 1000 Growth Index’s 2023 return came from 10 stocks. Active strategies that were underweight/short/not invested in these ten names in 2023 tended to underperform.
The Russell 1000 Growth Index has become increasingly concentrated. The top 5 holdings accounted for 41% of the Index at the end of 2023, up from 26% at the end of 2018.
Unlike the Japanese equity bubble of the late 1980s or the dotcom bubble of the early 2000s, the robust performance of the “tantalizing ten” may be justified as it has been propelled by the rapid top-line growth and strong cash flow generation of most of these businesses.
Valuation, however, may be a material headwind in our opinion. If the Russell 1000 Growth Index’s P/E multiple of 35X reverts to the long-term median of 23X, the implied future 10-year annualized return is below 5%.
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