Markets Brief: Why the Market’s Extreme Concentration Is an Opportunity

Weak Jobs Data Raises Rate Cut Expectations

The US economy saw further negative revisions to previous jobs numbers last week, with the latest data showing a 22,000 rise in payrolls, less than the 110,000 forecast. Jobs numbers rose by an annualized rate of only 0.2% over the three months to the end of August. According to Preston Caldwell, Morningstar’s senior US economist, federal government layoffs have played only a minor role in these figures, reducing the growth rate from 0.3%.

This weaker-than-expected employment data raised expectations of a 50-basis-point cut at the next meeting of the Federal Open Market Committee, and increased the probability of further cuts before the end of the year, an outcome that investors previously disregarded.

Dollar’s Fall Boosts Returns From Overseas Assets

The US dollar fell sharply on the news, reversing earlier gains and boosting returns for those investors who are internationally diversified. The impact of a weaker dollar can be illustrated by comparing the returns of the Morningstar Developed Markets ex-US Index over the past year, up 12.5% in euros, the largest currency represented in the index, and up 19.2% in dollar terms.

Alphabet Stock, Market Concentration and Opportunities

The Morningstar US Market Index ended the week 0.5% higher, but most of this gain can be attributed to the 10.7% rise in Alphabet GOOGL following news that it will not have to divest its Chrome or Android businesses. Despite the sharp increase in the stock price, Morningstar’s Alphabet analyst, Malik Ahmed Khan, believes the stock remains fairly valued.

The rise in Google’s parent company also boosted the Morningstar US Communication Services Index, which rose 5.1%, removing most of the sector’s discount to fair value, as Alphabet accounts for 40.2% of the overall value of the sector.

This reminds us of the ongoing challenge of concentration in the US market, where six technology-driven companies account for 29% of the value of the index. While this high level of concentration is a challenge for investors following an index tracking strategy, it creates opportunities for patient investors who are prepared to dig a little deeper into the market, as we continue to see opportunities in smaller companies that provide more diversified exposure.

China Stocks Attractive Even With 2025 Gains

China made headlines over the week, both for its vast military parade that highlighted a tightening relationship with Russia, as well as reports on speculation that the government was seeking to dampen investor sentiment. If true, this is in sharp contrast to the policy over the last few years of encouraging investment.

While the Morningstar China Index fell 1.6% in renminbi terms over the week, it remains 51.1% higher over the past year. Although these gains are significant, they reflect a starting point when Chinese stocks were very undervalued. Consequently, the market continues to offer attractive opportunities for investors.

This poses a challenge to those already invested that is similar to that of US technology stocks. When a small part of the portfolio experiences unusually high gains, it is likely that those stocks become a much larger part of a portfolio than originally envisaged and consequently, investors must accept either higher concentration risk or reduce exposure when further gains are possible.

While there is no right answer to this conundrum, it is important to consider your likely response to a sharp drop in prices as it is normally better to trim exposure when prices are high, than allow regret to drive a sale when prices have fallen.

Semiliquid Mutual Funds in the Spotlight

Given the ongoing volatility in government bonds and the dearth of attractive opportunities in credit, which continue to trade at unusually tight spreads (the additional yield over that available from a government bond an investor receives for accepting the default risk), it is unsurprising that investors are willing to accept the illiquidity and additional costs of private credit. This is precipitating the launch of ever more semiliquid mutual funds, which combine private and public assets. To help investors better understand these offerings, Morningstar has recently published this guide and started to issue Medalist Ratings on these funds. You can find out more about these ratings here.

Busy Week Ahead for Economic Data

This week, the focus will be on inflation ahead of the next meeting of the FOMC on Sept. 16-17. August producer price index data will be released on Wednesday, followed by August Consumer Price Index data on Thursday. While the consumer figures are typically more closely watched than the producer prices, as producers are likely to experience the impact of tariffs before consumers, both sets of data will be capable of moving asset prices. You can keep track of these announcements on this calendar.