Market Concentration at a 40-Year High: Why the Value Cycle May Still Be in Its Early Innings

The U.S. stock market is more concentrated than at any time in 40 years, with the top 30 stocks making up about 50% of market cap at the end of Q3 2026. Portfolio Manager Dan Lysik discusses the extreme concentration in the indexes and why he believes that sets up for future returns from stock selection in undervalued areas of the market. Historically, extreme concentration has been followed by periods when small-cap value outperformed. Small caps fell 8.8% in Q3 2026, their third-worst quarter in 50 years, and past weak third quarters were followed by strong fourth quarters.

Third quarter 2026 was lopsided. Mega-cap stocks rose 4.5%, while mid-cap and small-cap stocks fell about 6%. Even so, value stocks have outperformed growth stocks across every market-cap range, and over the trailing year. On our October MVP LIVE, Dan walked through the data behind why we believe this value cycle is still in its early innings.

Is the U.S. stock market too concentrated right now?

The 30 largest U.S. stocks now make up about 50% of total U.S. market cap. Before 2023, that share bottomed in the high 20s and peaked near 40%. Ten of the top 11 companies are AI leaders, and AI-related names have grown from the low 20s as a percentage of the S&P 500 in 2023 to 41% today.

That is close to the levels seen in the Nifty 50 of the 1970s, Japanese equities in the 1980s, and tech, media and telecom stocks in the 1990s. In the Russell 1000 Growth Index and the Nasdaq 100, the top 30 stocks make up 50% to 70% of the index.

Valuations are stretched too. We look at price-to-sales because it smooths out peaks and troughs in profitability. The top 30 stocks peaked at about 5 times sales in early 2000 and late 2021. At the end of September they reached a record 7 times, and the leading AI companies average more than 15 times.

What happens to small caps after a bad quarter?

Small caps fell 8.8% in Q3, the third-worst quarter in the past 50 years. History suggests that kind of weakness can be an opportunity. The six worst third quarters were followed by an average fourth-quarter return of +13%, and across all comparable periods the average was +8.4%.

Are small caps cheap compared with large caps?

By several measures, yes, and the gap is at a record.

The five largest S&P 500 companies are now nearly six times the market cap of the entire Russell 2000, a record that is nearly double the 2021 peak and four times the long-term average. Those five companies trade at 10.5x revenue, versus about 2x for the small-cap index.

Small caps usually trade at higher price-to-sales multiples than large caps, except in periods of extreme concentration. That gap is now a record 2 times, above the 1.5 times reached in 2000 and 2021. On a rolling 10-year basis, small caps versus large caps sit at the 1st percentile of the past 100 years.

How did small caps perform after the dot-com peak?

After the 2000 peak, valuations normalized over about seven years. From 2000 to 2006, small-cap stocks returned 185% cumulatively, or 16.2% a year, while large-cap growth lost 30%, or 4.9% a year. That is a 21.1% annual spread.

One recent trading day showed how quickly leadership can shift. When AI-related stocks came under pressure, the Russell 1000 Growth fell 2.8%, the QQQ fell 2.9% and the S&P 500 fell 1.2%, while small-cap value rose 1.3%. That is a spread of more than 4% in a single day.

Where do you see opportunity as the AI build out continues?

As the AI build-out matures, we expect the market to shift its focus from the companies spending on AI to those that benefit from implementing it and delivering productivity gains. Dan discusses two holdings:

Concentrix (CNXC), near $31 per share. In our view, this business-process company is significantly mispriced. The stock is down more than 80% from its $200 high, and revenue pressure should peak this quarter. The company holds more than 300 patents, and its proprietary AI platform is the higher-margin part of the business. It reported record Q3 free cash flow and expects more than $600 million for the year. It trades at roughly 2 times cash flow, and we see about $2 billion of free cash flow over the next three years supporting debt reduction and returns to shareholders.

Conduent (CNDT), near $1.65 per share. This microcap is in a multi-year transformation under a new CEO. It has delivered $100 million in cost reductions and generated $200 million from non-core asset sales. We see multiples of the current share price in equity upside over the next couple of years. We also find its 2029 debt, trading near $80 with a yield to maturity of about 15%, attractively priced.

Is the value cycle over?

We don’t think so. Record concentration, record valuation spreads and a historically weak quarter for small caps are the same conditions that preceded past periods of broadening. We see a significant opportunity for leadership to widen beyond the largest stocks over the coming years.

Views are as of the October 27, 2026 MVP LIVE discussion and may change.

Forecasts and valuation estimates may not materialize. Investing involves possible loss of principal; value and smaller-company stocks may underperform, remain undervalued, or experience greater volatility and limited liquidity.

CNXC and CNDT were held in MVP-managed portfolios and illustrate the views discussed, not all investments or recommendations. Holdings may change, and profitability is not assured. AI disruption, unsuccessful turnaround efforts, and indebtedness could impair these investment theses. The quoted bond yield is not guaranteed and is subject to credit and default risk.

Historical examples are selective, are not MVP investment results, and do not predict future outcomes. Past performance does not guarantee future results.

This commentary reflects the views of the author as of the date above and is subject to change. There is no guarantee that any forecast, outlook, or opinion will be realized. This material is for informational purposes only and should not be considered investment advice or a recommendation to buy or sell any security. Statements containing ‘may,’ ‘could,’ ‘expect,’ ‘likely,’ or similar words are forward-looking and involve risks and uncertainties. Actual outcomes may differ materially. Information from third-party sources is believed to be reliable but is not guaranteed as to accuracy or completeness. References to specific investments are for illustrative purposes only and are not a recommendation to buy or sell any security. Portfolio holdings and positioning are subject to change. It should not be assumed that any investment in the securities referenced was or will be profitable.

Figures cited above should be verified against primary sources (e.g., Federal Reserve releases) and may reflect market estimates. Statements reflect our interpretation of public data; exact figures may vary by source and revisions.

The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned. References to specific securities are for illustrative purposes only. Portfolio composition is shown as of a point in time and is subject to change without notice.

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