Is the S&P 500 over-concentrated in July 2025

The S&P 500 is the leading stock market index in the United States, comprising the top 500 US companies, and is a popular choice for global investors.

However, in recent years, a few tech giants have taken the lead, with the five largest companies accounting for 26.6% of the index at the time of writing.

This prompts the question: are S&P 500 investors placing too much emphasis on just a few major companies?

The hidden risks of a concentrated market

For several years, five well-known giants — Nvidia, Microsoft, Apple, Amazon, and Meta (Facebook) — have wielded significant influence over the S&P 500.

Perhaps they should rename it the S&P 5? These companies account for 16.5% of the FTSE All-World Index at the time of writing.

Since the S&P 500 is weighted by market capitalisation (meaning larger companies naturally have more influence), it tends to favour those that grow the fastest. In other words, success breeds success.

This creates a feedback loop: popular companies attract more investment, increasing their dominance.

When just a few firms experience massive growth, an entire index can become heavily reliant on them. If even one major player falters, the entire market can feel the impact.

History, from the dot-com bubble to the Nifty Fifty craze, has repeatedly shown that extreme market concentration rarely concludes without drama.

For UK investors relying on the S&P 500 as a broadly diversified index, it might be surprising to realise how many of their investments are concentrated in relatively few companies.

History shows we've been here before

Reflecting on the past, significant market changes have often occurred after periods where a few superstar stocks dominated.

Consider the early 1970s, when investors were enamored with the "Nifty Fifty." Companies like Polaroid, Xerox, IBM, and Coca-Cola appeared invincible — until they suddenly weren't.

From 1973 to 1982, the S&P 500 made no progress, and after accounting for inflation, it was even worse. Former favourites experienced steep declines in their valuations.

During that same lacklustre decade, more diversified portfolios that included smaller companies, emerging markets, and commodities performed significantly better.

Jump to the millennium: the dot-com crash in 2000 initiated a similar scenario. Tech giants like Cisco, Intel, and AOL saw their values fall dramatically. None regained their previous heights.

From oil giants to tech titans

The leadership of the S&P 500 has shifted numerous times over the years, as seemingly invincible giants have stumbled due to evolving circumstances.

In the early '90s, tech stocks represented only about 6% of the market, compared to the current 30-40%. At that time, traditional sectors like financials, industrials, and energy were predominant.

Going back another decade, the energy sector alone constituted nearly 29% of the S&P 500. Oil giants were dominant, supported by high prices resulting from geopolitical tensions, supply disruptions, and strong global demand.

The takeaway? Even the most powerful sectors eventually decline.

Comparing to other markets

If you believe concentration risk is only a US issue, reconsider. Many global indices face similar challenges, including the UK's FTSE 100.

Although the FTSE 100 comprises a hundred leading UK companies, a handful often wield significant influence.

Major multinationals like Shell, AstraZeneca, and HSBC each occupy a substantial portion of the index — collectively representing 20.9% based on current data.

Historically, the top ten companies have constituted nearly half of the FTSE 100's value.

Smaller European markets frequently experience even greater concentration. Switzerland's index is predominantly controlled by Nestlé, Roche, and Novartis, while France heavily depends on luxury leader LVMH (Louis Vuitton).

These indices often see their top ten stocks comprising more than half of their total value, making the S&P 500's concentration issues appear relatively minor by comparison.

What the other experts think

Wall Street's leading analysts and experts have grown increasingly concerned about the dominance of a few massive companies within the S&P 500.

Goldman Sachs has highlighted that market concentration has reached levels not seen in decades, warning that this could significantly restrict returns over the next ten years.

Morgan Stanley has expressed similar concerns, emphasizing that when a small number of companies lead the market, it reduces diversification, making portfolios vulnerable if any of these giants falter.

JPMorgan researchers have noted that during previous periods of extreme concentration, small and mid-sized stocks often outperform significantly once the market rebalances.

Conversely, not all experts view today's concentration as a dire warning.

Analysts from asset management firm Alger argue that today's largest companies — such as Apple, Microsoft, and Google — are fundamentally different from past market leaders.

These modern giants justify their high valuations and market dominance with substantial profits earned globally — despite being based in the US, they have customers worldwide.

These contrarian analysts compare the current situation to the "Nifty Fifty" era of the 1970s, suggesting that while those companies seemed overpriced at the time, many — like Coca-Cola, Eli Lilly, Johnson & Johnson, Walmart — ultimately delivered robust growth, proving skeptics wrong.

However, even proponents of these large-cap stocks acknowledge that concentration poses risks for index investors.

BlackRock's research indicates that news from a single major firm can now affect the entire market in ways not previously seen with broadly diversified indices. This increases what they refer to as "idiosyncratic risk" — the chance that negative news from one company could destabilize the entire market.

Ethical investing could increase concentration risks

ESG (environmental, social, and governance) funds, such as the S&P 500 ESG Index or Vanguard's ESG Global Stock ETF, exclude controversial industries like oil, tobacco, and weapons manufacturers.

This approach feels morally satisfying and is based on a logical principle: why invest in a future if it might not exist?

However, there's a downside — and it's not just about higher fees.

In times when the S&P 500 is already dominated by a few large companies, ethical investing can inadvertently increase your investment in these same firms.

With controversial sectors removed, ethical indices often compensate by investing even more in these major companies.

It's akin to giving up meat only to end up consuming a diet of Greggs' vegan sausage rolls — not exactly balanced.

Three ways to reduce concentration risk

If staking your future on the fortunes of Silicon Valley makes you feel uneasy, there are ways to make your portfolio less dependent on a handful of glitzy tech names.

Think of index investing like a karaoke night: you can let a couple of passionate singers take over the whole evening, allot everyone an equal amount of time, or find a halfway-house that's fair while also recognising that not everyone is Celine Dion.

1. Equal-weight indices

With an equal weight index, every company gets the same slice of the pie, whether it's Apple or a firm you've never heard of. It's karaoke democracy.

This reduces reliance on the biggest names and gives smaller companies a chance to shine. Over the very long term, equal-weight indices have even outperformed their market-weighted counterparts.

But there's a downside: when Elvis Presley reincarnated shows up at the karaoke night, he still gets cut off after one song so tone-deaf Bill from accounting can belt out Sweet Caroline.

In investing terms, that means truly exceptional, high-growth companies are given the same weighting as plodding firms like Spades & Trowels Inc.

Equal-weight indices also typically have higher costs because they require regular reshuffling to maintain balance, and are likely to see higher volatility too.

2. Fundamentally weighted indices

Known as 'smart beta', these indices don't hand out mic time based on popularity (market value) or fairness (equal weight). Instead, they launch an X Factor-style hunt for hidden talent. That means choosing companies based on real-world fundamentals like revenues, earnings, dividends, or assets.

It's an approach that priorities substance over style. By focusing on economic strength, these strategies avoid overhyped stocks with no earnings that rely solely on potential.

Historically, they've tilted towards undervalued companies — so-called "value stocks" — which can help reduce the risk of getting caught in market bubbles.

The trade-off? If the flashy growth stocks do end up delivering on their promises, this strategy might miss out. And like equal weighting, it means paying higher fees.

3. Set limits with sector or stock caps

Capped indices let the big names take the mic — just not for the entire night. There's a limit on how much influence any one stock or sector can have. If one act starts to dominate, it gets trimmed back at the next break — rebalancing.

This isn't about finding hidden talent like with the smart beta approach, or giving everyone the same stage time like with equal weighting. It's about keeping the party from being completely taken over, while still giving the most popular voices longer on stage than Bill — God I wish Bill would shut up for once.

A capped index means you can still tap into the success of market leaders, while avoiding overreliance on just a few names.

Like the other two strategies, these funds tend to come with higher fees — and if today's top performer continues to soar, you might miss out on some gains, though typically less than with a purely equal-weighted approach.

This lets you customise your exposure — giving more weight to the index's leaders than an equal-weight fund would, but without the overconcentration risk of a traditional market-cap-weighted approach.

Bottom line

The S&P 500 is a global favorite for a reason, yet it is currently heavily influenced by a few tech giants.

This isn't inherently negative, as these companies have rightfully secured their positions. However, it does pose additional risk for those aiming for diversification.