Along with this extreme market cap concentration, market breadth — a measure of the percentage of stocks outperforming an index — in the S&P 500 has never been so narrow.

Antipodes Partners chief investment officer Jacob Mitchell said these market extremes have historically signalled a turning point in the market where less popular, lower multiple market losers begin to outperform the current winners. 

“Given the global pandemic that has been sending shock waves through economies in the past months, it’s astounding to see that this US-led market cap concentration has surpassed the previous historical highs seen during the dotcom bubble,” Mr Mitchell said.

However, he is not surprised by this reaction with cyclical stocks — which are broadly characterised as basic materials, consumer cyclical, financial, services and real estate — losing to the market.

“With acceleration in technological disruption and hits to business confidence, it’s no surprise that today, lower multiple losers are characterised by the more economically sensitive or cyclical parts of the market,” he explained.

“Admittedly, outperformance from these stocks will require a change in the current narrow narrative as economies cyclically recover and stimulus switches from income protection to investment, with China and Europe leading this with decarbonisation, EV and 5G adoption,” he said.

“Given the extreme level of multiple dispersion, tomorrow’s market leaders are most likely to be misunderstood cyclicals.”

However, he has warned investors about simply buying cyclical stocks with a low multiple, but instead encouraged investors to look deeper.

“Don’t just buy a cyclical because it’s on a low multiple. Within this broad group, look for great businesses, attractively priced with embedded growth opportunities that the market is currently overlooking,” Mr Mitchell concluded.