Is the market too centralized and in a bubble? Cathie Wood points out two key factors.

As the U.S. stock market continues to reach new highs this year, investors cannot help but worry about the risk of a bubble. Cathie Wood, CEO of Ark Invest, believes that the current stock market's pursuit of cash and safety is as strong as it was during the Great Depression in the 1930s. However, when the fear dissipates, the market will expand and once again reward risk-taking behavior.

Market Overly Concentrated in Seven Tech Giants

Ark Invest's recent report pointed out that due to the strong long-term performance and high market capitalization weight of large tech stocks, the Nasdaq 100 and S&P 500 indices are becoming increasingly similar. Many mature companies that were considered pioneers 10 to 40 years ago are no longer at the forefront of innovation.

Being highly concentrated in the Nasdaq 100 and S&P 500 indices, the seven tech giants, known as the Mag Seven, have dominated the recent stock market performance. The Mag Seven's weights account for 40% and 29% of the Nasdaq 100 and S&P 500 indices, respectively. This reflects the current situation of market overconcentration.

Cathie Wood, also known as "Wood Sister," explained the historical record of market overconcentration with a table, which calculates the market capitalization of the largest stocks relative to the 75th percentile stocks, representing the extent to which large stocks dominate the overall market value. It is evident that the current market concentration is at a historical high.

The Key to Breaking Out of a Healthy Market Pattern

Wood pointed out that the most similar situation is none other than 1932! For better understanding, we have included the trend of the Dow Jones Industrial Average during that period in a light orange shade. It can be seen that after 1932, the Dow Jones Industrial Average slowly emerged from the depths of the Great Depression, as the market gradually shifted from large-cap stocks to other sectors, driving the overall stock market upward.

Wood proposed that there is still an opportunity for the market to break out into a healthy pattern,

More deflation and lower interest rates will kick off another round of stock market rally.

ARKK's Recent Performance Falls Short

However, the recent performance of the ARK Innovation ETF ARKK has been somewhat disappointing. Over the past year, the tech-representing QQQ rose by 31% (orange line), the S&P 500 index SPY rose by 26% (green line), while ARKK only rose by 10% (deep blue line). Moreover, in this year's bull market, ARKK has surprisingly dropped by 15% from the beginning of the year to date.