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Big Companies Are Likely to Get Bigger—What Could That Mean for Your Portfolio?


August 4, 2020


TOP U.S. TECHNOLOGY COMPANIES do more than dominate their industry. Many started out of garages and dorm rooms, and now represent nearly a quarter of the total S&P 500 market capitalization.1


That’s not just an anomaly of the fast-growing tech sector. Industry after industry is consolidating in the hands of its biggest players, says Kathryn C. McDonald, Vice President and Market Strategy Analyst, Chief Investment Office (CIO), Merrill and Bank of America Private Bank. “Market concentration has risen in 75% of U.S. industries over the past 20 years.” And, McDonald adds, the coronavirus pandemic is accelerating that trend by separating the weak from the strong.


“Market concentration has risen in 75% of U.S. industries over the past 20 years.” —Kathryn C. McDonald, Vice President and Market Strategy Analyst in the Chief Investment Office for Merrill and Bank of America Private Bank

Consolidation during crisis

“Big companies are likely to get bigger and gain market share from smaller competitors” as a result of the pandemic, notes McDonald. Already, the top four U.S. airlines control 80% of the market, three companies process two-thirds of U.S. beef, and health care has averaged 70 hospital mergers per year since 2010, according to a new CIO report, “The Great Consolidation: Industry and Equity Market Concentration After the Crisis,” co-authored by McDonald and Nick Giorgi, a vice president and investment strategist, Chief Investment Office, Merrill and Bank of America Private Bank.


The pandemic could lead to new mergers and acquisitions, as well as bankruptcies of struggling firms. “Meanwhile, industry leaders with stronger balance sheets are likely to be more resilient,” McDonald says. And consumers may be more loyal to major brands that they know and trust.


What this trend could mean for investors

Though smaller companies and innovative startups continually refresh the landscape, consolidation offers investors the opportunity to potentially benefit from strong performance by larger, more established companies. “Sectors with rising concentration have tended to enjoy better stock performance in recent decades.”2 says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “We favor high-quality names with strong balance sheets, valuable intangible assets and strong cash flow.”


“While we prefer large-cap stocks at this point in time, we recommend a diversified allocation across the spectrum.” —Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank

Investors may find long-term potential opportunities in financial services, consumer goods, industrials, healthcare, technology, energy and other industries whose largest firms are investing in growth even during the recession, Hyzy says. However, he cautions, that doesn’t mean you should abandon stocks of smaller companies. “While we prefer large-cap stocks at this point in time, we recommend a diversified allocation across the spectrum.”


Minding the risks

Hyzy offers this useful reminder: Size can come with risk. Take big tech—its growing influence in the global economy may be skewing wealth and market share toward a handful of companies. That possibility has prompted some regulatory risk for some of the most visible tech industry leaders, with lawmakers potentially introducing legislation that could limit or reverse the companies' concentration of power. Companies that use their size and influence to benefit society as well as the bottom line could stand to benefit, while those that, for instance, ignore or de-emphasize environmental, social and governance (ESG) issues could potentially be at greater risk.

Source: Bloomberg, data as of July 2020.


Grullon, G., Larkin, Y., and Michaely, R. “Are U.S. Industries Becoming More Concentrated?” Oxford Review of Finance, April 2019.


Information is as of 08/04/2020.


Opinions are those of the author(s), as of the date of this document and are subject to change.


Investing involves risk including possible loss of principal.


Past performance is no guarantee of future results.


Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.


The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., (“Bank of America”) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S” or “Merrill”), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation.


Investments in a certain industry or sector may pose additional risk due to lack of diversification and sector concentration.


Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.


Stocks of small- and mid-cap companies pose special risks, including possible illiquidity and greater price volatility than stocks of larger, more established companies.


Investing in growth stocks incurs the possibility of losses because their prices are sensitive to changes in current or expected earnings. Value stocks are securities of companies that may have experienced adverse business or industry developments or may be subject to special risks that have caused the stocks to be out of favor. If the manager’s assessment of a company’s prospects is wrong, the price of its stock may not approach the value the manager has placed on it.


Investments in foreign securities (including ADRs) involve special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are magnified for investments made in emerging markets.


Impact investing and/or Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating.




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