The dominance of the 10 biggest stocks in US equity markets is increasingly drawing similarities with the dot-com bubble, raising the risk of a selloff, according to JPMorgan Chase & Co. quantitative strategists.

The share of the top 10 stocks on the MSCI USA Index, including all of the so-called Magnificent Seven tech stocks, has risen to 29.3% by the end of December, the strategists led by Khuram Chaudhry wrote in a Tuesday note.

That’s just moderately below the historical peak share of 33.2%, which occurred in June 2000. Furthermore, only four sectors are represented in the top 10, compared to the historical median of six, the strategists said.

While parallels between the current environment and the speculative frenzy surrounding internet stocks at the turn of the century are frequently dismissed, the strategists’ analysis shows the circumstances “are far more similar than one may think,” they said.

“The key takeaway is that extremely concentrated markets present a clear and present risk to equity markets in 2024,” they wrote. “Just as a very limited number of stocks were responsible for the majority of gains in the MSCI USA, drawdowns in the top 10 could pull equity markets down with them.”

US stocks have been soaring as the economy held up better-than-expected, with an increase in interest-rate cut bets fueling the rally further in the final months of 2023. Optimism about artificial intelligence has also boosted tech stocks such as Nvidia Corp. and Microsoft Corp., prompting warnings of a bubble.

The top 10 stocks in the MSCI USA command a higher valuation premium relative to the rest of the index when compared to the height of the dot-com bubble, even though valuations in the early 2000s were significantly more extreme than now, the strategists said.

“Valuations being lower in absolute terms would suggest that the risks around concentration are currently not in the same order of magnitude as in the dot-com era,” Chaudhry’s team said. Still, the strategists warned that extremely stretched valuations could be an indicator that the concentration is approaching its limits, requiring a de-rating.

The likelihood of the broader index outperforming the top ten in the near future is becoming increasingly likely, they said.

“Given the magnitude nature of recent moves, as well as the extremes in equity positioning, we do expect equity market drawdowns to materialize, which may well be driven by weakness in the top 10,” the analysts said.

This article was provided by Bloomberg News.