Are the Mag 7 Just the New Railroads?
History suggests dominance never lasts—yet could today’s tech titans be different?
You cannot open LinkedIN, listen to a podcast, or go to an investment conference these days without hearing about the dangers of the current concentration of the US stock market. A couple of weeks ago, I reported (NBIM CIO) Nicolai Tangen’s acknowledgement of this risk and the strategy he recommends to manage it.
Of course, the current concentration in the largest 10 US stocks represents a problem for the active manager trying to outperform, especially when these stocks keep beating the market as a whole and when that concentration is widely perceived by managers as being too risky.
This question of risk is important, so I thought the historical context might help us understand the degree of the problem it poses for investors and the market.
Elroy Dimson and colleagues have produced the formerly Credit Suisse and now UBS Investment Yearbook for many years and they have compared the industry weightings today vs at the start of the 20th century, as shown in the chart below:
Industry Weightings Change over 125 Years
Source: UBS Investment Returns Yearbook
The concentration today is not nearly as great as it was at the start of the last century when rail dominated both the UK and the US stockmarkets. But the peak of rail’s dominance was actually some 50 years earlier. This is a great capital cycle study as too much capital was raised for railways then, creating a classic over-supply. Nevertheless, the emergence of the railway network was a key driver of economic growth in the 19th century. The nation expanded westward and railroads facilitated the movement of goods and people and the creation of new industries.
There is an obvious parallel with the rollout of fibre in the dot.com era leading to the boom in internet video in the last 20 years. Could there be a parallel in AI? First, a word from my sponsor:
Join Lloyd Blankfein & Top Investors at AlphaSummit NYC
AlphaSummit 2025 is my sponsor AlphaSense’s inaugural customer conference, bringing together top institutional investors, business leaders, and AI experts to explore how agentic search and market intelligence are transforming decision-making in AI-first organizations.
Why Attend:
Lloyd Blankfein, Former Chairman & CEO, Goldman Sachs — live conversation on markets, risk, and leadership
Nick Saban, 7× national champion, on team building and performance
Executives from Google, UBS, Stripe and more
AI-powered workflows, product deep dives, and early access to new AlphaSense capabilities
Optional platform certification & exclusive workshops
Register Now: Spots are limited — don’t miss this opportunity to connect with industry leaders and gain the insights you need to stay ahead in today’s AI-first investing landscape.
1850s - Early 1900s: The Age of Rail
The construction of the railroad networks required an immense amount of capital, which was largely raised through the issuance of stock. This made railroad companies, like the Pennsylvania Railroad (why so many stations on the east coast are called Penn Station) and Union Pacific, the largest and most widely held stocks on the market, and the equivalent of Apple and Microsoft today.
Investment mania surrounding railroads then paralleled today’s AI and technology enthusiasm. Entrepreneurs and financiers started betting on ambitious enterprises like the Northern Pacific Railway; and as the transportation boom raged on, more than 60% of total U.S. stock market capitalisation came from railroad stocks. The speculation was intense, with investors convinced that railroad investments represented the future of the American economy. At one point, railroads reportedly made up 80% of the market.
The railroad companies of this era were therefore the equivalent of today’s technology giants - infrastructure plays that enabled an entirely new way of conducting business. The emerging American financial system was based on railroad bonds.
The concentration began to decline as other industries emerged and matured. In 1845, the Vermont Central Railroad was the largest corporation in the United States, and a transportation company remained the largest company in the United States until Standard Oil took the title in 1884.
1880s-1920s The Age of Standard Oil and Industrial Monopolies
After the Civil War, railroads spread to every city in the United States and new industries were able to quickly spread, aided by the new availability of electricity.
New products emerged like the telegraph, telephone, and typewriter. Dozens of new industries, many of them consumer goods, sprung up – from sewing machines to typewriters, photography to radio, mail order to department stores.
Western Union began trading in 1864, American Express in 1866, and the Pullman Palace Car Co. in 1870. The number of stocks grew dramatically after the Civil War ended, rising from 267 in 1865 to 676 in 1875.
As the railroad era matured, a new form of concentration emerged through industrial trusts and monopolies. The rise of heavy industry, like steel and oil, along with the growth of financial and manufacturing sectors in the late 19th and early 20th centuries, began to diversify the market. The number of stocks increased from 676 in 1875 to 2097 in 1895.
Yet the concentration in the United States stock market actually increased between 1892 and 1903, a period which saw the rise of massive industrial conglomerates that dominated entire sectors - Standard Oil by 1890 was the largest company in the world.
By 1880, through elimination of competitors, mergers with other firms, and use of favourable railroad rebates, it controlled the refining of 90 to 95 percent of all oil produced in the United States. By 1900, Standard Oil represented 9% of the US stock market, and the top 10 companies 24%. New companies in new industries, many still around today, came to the market to raise capital.
Notable IPOs in the Period
The dominance of the trusts created the first major antitrust backlash in American history. The Sherman Anti-trust Act of 1890 was the first measure passed by the U.S. Congress to prohibit trusts. Antitrust suits broke up American Tobacco and Standard Oil and put other industries on notice not to limit competition. The 1911 breakup of Standard Oil marked the end of the first great era of industrial concentration and 34 oil companies were spun off.
Standard Oil of New Jersey, California, New York and Indiana were each among the ten largest companies in the United States during the 1920s. By 1928, the expansion of all of these industries, the growth of regional stock exchanges, and new interest in the stock market increased the number of companies to 3825 (vs 2097 in 1895). Consequently, the concentration of the US stock market declined between 1900 and 1929.
Concentration of the US Stockmarket %
Source: Global Financial Data
In 1929, the largest company, AT&T, represented only 3% of the stock market and the comparisons in the table show a marked decline in concentration. But after the 1929 stock market crash and over the next four years, the number of companies fell by 40%, and the concentration of the stock market began to increase once again.
Forensic Analysis Bootcamp
This is getting close to your last chance to sign up for our forensic analysis bootcamp, kicking off on October 6. There are a couple of spaces left. It runs for 8 weeks every Monday night at 17.30 London, 12.30 EST, 9.30 PST. Classes last 60-90 minutes and allow plenty of time for questions.
The curriculum is the full setup we offer to institutional investors but with some additional explanation and extra time allowed for a more considered deliberation. And every session is recorded, so if you are travelling one week, no problem, simply watch the recording.
1930s-1960s
The Great Depression and its aftermath saw a new form of concentration emerge. The original Magnificent Seven was born, with AT&T, General Motors, IBM, Standard Oil, General Electric, du Pont, and U.S. Steel dominating during the 1930s-60s. These seven remained among the 10 largest companies during most of those three decades while between 1933 and 1964, the number of companies on the New York, American and other stock exchanges remained around 2300.
The post-WWII boom and the subsequent rise of the American middle class led to another explosion of new companies and industries. The stock market began to reflect a more diversified economy with the growth of consumer goods, automobiles, and pharmaceuticals. This period was characterized by a broad-based economic expansion that naturally spread market capitalization across a wider range of companies.
United States Sectors Share of the Market, 1793 to 2023
Source: Global Financial Data
Mid-60s to Early 1990s
The mid-1960s ushered in three decades of rapid change, with significant industrial innovation – this was a tech era, with semiconductors, computers, health care, and other technology industries growing dramatically.
And it wasn’t only in technology that the stockmarket was transformed. Companies like McDonalds, Disney, Walmart and many others discovered new products and created new services to provide to the US consumer and business.
In the 1970s, the energy crisis hit, and energy companies grew at the expense of the rest of the economy. The economy entered a stagflationary period and the stock market fell. Many of the Nifty Fifty stocks collapsed in price while the price of oil increased tenfold.
In 1980, six of the top ten companies by market cap were oil companies while in 1972, only two oil companies had been in the top ten. In 1984,American Telephone and Telegraph was broken up into Ma Bell and the Baby Bells. IBM lost its position as the largest company in the United States in 1989 to ExxonMobil, but Intel and Microsoft entered the Top 10.
The number of companies covered by one research house increased from 2367 in 1960 to 8513 in 1996. By 1993, the growth of these new industries reduced the concentration in the American stock market to the lowest level in its history; the decline in concentration is shown in the table.
Concentration of the US Stockmarket %
Source: Global Financial Data
1990s to 2010
The 20 year period from 1993 to 2014 saw an increase in the concentration of US stocks. In the dot.com bubble, internet, media and computer stocks soared and tech companies started to move into the Top 10. Microsoft, IBM, Intel, and Cisco Systems were among the ten largest companies in the United States as were healthcare companies Pfizer and Merck. In 2008, Microsoft was the only technology company that remained in the Top Ten and it was joined by Apple in 2009.
Concentration peaked in the dot.com bubble and this is probably the root cause of discomfort with the present concentration. In 2000, it was quite different as valuations for anything tech related were eye-watering, while old world companies’ valuations were on their knees.
2010 to Today
Concentration today is even greater than it was at the top of the dot.com boom. Yet valuations for many tech companies today are much lower than some of the crazy levels then; and valuations elsewhere are more normal than the depressed valuations for old world stocks then. The leading tech companies are much larger and much more profitable today, although some commentators see an element of speculative “froth” emerging with AI.
The current era of concentration, exemplified by the Magnificent Seven, has reached historically high levels. The comparison with the position 30 years ago is stark:
Concentration of the US Stockmarket %
Source: Global Financial Data, AlphaSense, Yahoo Finance
Nvidia’s roughly 40x over this period reflects the company’s central role in the artificial intelligence revolution, much as railroad companies were central to the transportation revolution of the 19th century. We don’t have data for the individual railroad stocks which is a shame.
As ever in these situations, the “froth” is potentially justifiable as the new technologies have massive scope; it’s a similar situation to eyeballs in the dot.com era. We don’t know what AI will bring and the market is prepared to trust that these eye-watering investments will bring some return. It’s hard to see how, but if Nicolai Tangen, head of the largest investment fund in the world, can speculate on a 50% increase in productivity in his own organisation, the prize could clearly be massive. Whether Meta or Microsoft or other leaders will be able to exploit this is another matter and of course the massive investments are already being made – it’s the returns which are hard to guess.
Top 10 Stocks as a Percentage of the Top 500 Stocks, 1875 to 2024
Source: Global Financial Data
Lessons from History
The history of American stock market concentration shows that it has been cyclical. Concentration has generally increased during bull markets and decreased during bear markets.
High concentration has often coincided with transformative technological or economic changes. The railroad era coincided with the industrial revolution and westward expansion. The trust era reflected the maturation of industrial processes and the benefits of scale. Today’s tech concentration reflects the digital transformation of the economy and the rise of artificial intelligence.
Extreme concentration can also trigger regulatory responses. The trust era led to antitrust legislation. Standard Oil was broken up in 1911. Today, the tech giants face increasing regulatory scrutiny.
Concentrated markets can reflect innovation and economic growth - the railroad companies of the 19th century built the infrastructure that enabled America’s economic expansion. Today’s tech giants have created platforms and technologies that have transformed commerce, communication and media and AI offers an opportunity to accelerate productivity.
But concentration, particularly in an industry or sector, can also create systemic risks. If the past is a guide, the current period of extreme concentration should eventually give way to a more diversified market structure. This could happen through regulatory intervention, the maturation of current technologies, the emergence of new technologies or players, failure to deliver on the investments, or simply natural evolution.
Of the US firms listed in 1900, more than 80% of their value was tied to industries that have either shrunk or disappeared completely. Even the most dominant companies and industries have eventually been displaced by new innovations and changing economic conditions.
Premium subscribers can read on for a few thoughts on current S&P500 concentration, and the present valuations and related outlook.