Is the S&P 500 too concentrated?

Obesity drugs may boost GDP # # --------------------------------------------------------------- The key takeaways today: - Are a handful of US stocks too dominant? - How obesity drugs might affect US GDP - Hedge funds are bullish on European stocks - Turning unused office space into apartments is just too expensive - Briefings Brainteaser: Which asset has underperformed US Treasuries? Was this newsletter forwarded to you? [Sign up now](. --------------------------------------------------------------- Is the S&P 500 too concentrated? As the stock market's performance has been increasingly decided by a handful of powerful companies, popularly known as the Magnificent Seven, investors have wondered [whether this level of concentration will sink the market](. Goldman Sachs Research examined S&P 500 market cap concentrations over the past century and found that, in most cases, stocks continued to rally. (Listen to the Goldman Sachs Exchanges [episode on market concentration here]( The 10 largest US stocks now account for 33% of the S&P 500 index's market value, well above the 27% share reached at the peak of the tech bubble in 2000, Ben Snider, senior strategist on the US Portfolio Strategy macro team in Goldman Sachs Research, writes in the team's report. The current concentration has helped drive a period of exceptionally strong US market returns. The S&P 500 has generated an annualized total return of 16% over the past five years, compared with a 30-year annual average of 10%. The top 10 stocks have accounted for more than a third of that gain. “While investors usually think of elevated concentration as a sign of downside risk, during the 12 months after past episodes of peak concentration the S&P 500 rallied more often than it declined,” Snider writes. He also notes that today's top stocks trade at lower valuations than the largest stocks did at the peak of the technology bubble, and they have higher profit margins than during other episodes of high concentration. --------------------------------------------------------------- Obesity drugs are among the health breakthroughs expected to boost GDP A primary benefit of healthcare innovation is improved health outcomes that enable people to live better and longer lives. However, the ongoing wave of healthcare innovation [could also mean big gains for the US economy]( according to Goldman Sachs Research. Added up, the emergence of weight-loss medications, AI-powered drug discovery, genomic and regenerative medicine techniques such as gene and cell therapy, and advances in diagnostics for the detection of diseases such as Alzheimer's could raise the level of US GDP by 1.3% in excess of its current trend in the coming years. That's equivalent to about $360 billion per year in today's dollars. Other findings from our economists include: - GLP-1 drugs could raise GDP. New therapies could prove instrumental in addressing obesity, which shaves about 3% from per capita output, or more than 1% from total output when the more-than-40% share of the US population that suffers from obesity is factored in. Added up, the new crop of weight-loss drugs could mean a 0.4% boost to US GDP in the team's baseline scenario, or more than 1% if the drugs' uptake comes in at the high end. - AI may speed up drug discovery. AI models may shorten the development of successful pre-clinical drug candidates from as much as five years down to as little as 18 months. That could translate into a meaningful improvement in combatting chronic diseases such as cancer, fibrosis, and aging-related diseases, among others. - Gene editing could expand the pool of treatable disorders. This innovation involves cutting out or repairing a disease-causing genomic segment, or even inserting “corrected” genes to target diseases. New developments include multiplexing — the editing of several genes simultaneously. --------------------------------------------------------------- Hedge funds are bullish on European stocks Goldman Sachs' hedge fund clients' net exposure to European stocks has risen to the highest level in at least five years. Our hedge fund clients' net exposure to European equities rose to 22.4% of their global net exposure on March 21, Goldman Sachs Global Banking & Markets' Prime Services book data show. It was the fourth straight week of net buying of the region's stocks, and Europe is the most net-bought region on the Prime book so far this year. Nine of eleven sectors in Europe are net bought, year to date. That's been led in notional (US dollar) terms by industrials, information technology, financials, and healthcare. Consumer discretionary and materials companies are the only sectors that have been net sold in 2024. In case you missed it: Read [our previous article]( and [listen to our podcast]( about how firms are allocating assets to hedge funds. --------------------------------------------------------------- Can unused office space become residential real estate? As office vacancy rates rise in major US cities, and as residential real estate continues to be in short supply, the solution might seem obvious: turn office buildings into multifamily residences. But even in this imbalanced market, there are [large physical and financial hurdles to such conversions]( according to Goldman Sachs Research. Around 4% of office buildings are potentially no longer viable to be used for their intended purpose. Our analysts define a nonviable office as a building that's more than 30 years old, has seen no renovations since 2000, and has a vacancy rate higher than 30%. The average price of such offices has fallen 11% since 2019 to $307 per square foot. Even so, Goldman Sachs Research finds that only about 0.4% of office space was converted into multifamily units per year before the pandemic, rising only to 0.5% in 2023. Converting underutilized office space to residential units is harder than it sounds. The costs of acquiring and converting commercial buildings are high, and regulations often make the conversion time-consuming and difficult. Prices also have not fallen to reflect vacancy rates, analyst Vinay Viswanathan says. “Not many properties are changing hands, which is a function of the limited availability of financing, as regional banks are pulling back,” he says. “And banks, rather than liquidating defaulted loans, have been modifying them to give time to landlords to figure out their plans. So we aren't seeing many foreclosure sales either.” Goldman Sachs Research estimates that the annual conversion rate from office to multifamily will remain low and only increase to 0.6% in 2026, and to 0.7% in 2028. The conversion will create just 20,000 additional units for the multifamily market per year, a small amount compared to the 468,000 multifamily units that were built in 2023. --------------------------------------------------------------- Briefings Brainteaser: Bulls and bears Stock markets around the world have rallied this year, as has bitcoin. But not every asset has had a similar bull run. In the year to date (as of March 25), which of the following has had a worse return than 10-year US Treasury bonds? A) USD / EUR B) S&P 500 Healthcare stocks C) S&P 500 Utilities stocks D) S&P 500 Real Estate stocks [Check the answer here](. --------------------------------------------------------------- Goldman Sachs in the news By clicking on these links, you will redirected to external websites that Goldman Sachs does not own or operate. Goldman Sachs is not responsible for the products, services, or content provided on those sites. Please refer to each external website's terms, privacy and security policies for details. [Bloomberg]( March 22 Goldman's Oppenheimer: appealing valuations outside US (1:48) --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The opinions and views expressed in this newsletter may not necessarily reflect the institutional views of Goldman Sachs or its affiliates. The information provided in this newsletter is for informational purposes only and does not constitute a recommendation from any Goldman Sachs entity to the recipient. Goldman Sachs is not providing any financial, economic, legal, investment, accounting, or tax advice through this newsletter or to its recipient. Certain information contained in this program constitutes “forward-looking statements,” and there is no guarantee that these results will be achieved. Goldman Sachs has no obligation to provide any updates or changes to the information in this newsletter. Past performance does not guarantee future results, which may vary. Each logo used in this newsletter is the property of the company to which it relates, is used here strictly for informational and identification purposes only, and is not used to imply any sponsorship, affiliation, endorsement, ownership, or license rights between any such company and Goldman Sachs. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this newsletter and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed. The Investment Strategy Group, part of the Asset & Wealth Management business (“AWM”) of GS, focuses on asset allocation strategy formation and market analysis for GS Wealth Management. Any information that references ISG, including their model portfolios, represents the views of ISG, is not financial research and is not a product of GS Global Investment Research and may vary significantly from views expressed by individual portfolio management teams within AWM, or other groups at GS. Past performance is not indicative of future results. ISG projections are based on assumptions and are subject to significant revision and may change materially as economic and market conditions change. To the extent this newsletter includes material from the Goldman Sachs Securities Division, please click [here]( for information relating to Global Markets material and your reliance on it. To the extent this newsletter includes material from Goldman Sachs Asset Management, please click [here]( for additional disclosures. [Click here]( to unsubscribe. © 2024 Goldman Sachs, All rights reserved. 200 West Street, New York, NY 10282, USA --------------------------------------------------------------- [GS.com]( | [Careers Blog]( | [Privacy and Security]( | [Terms of Use]( [Twitter](