We’ve been fielding some variation on the above question regarding S&P 500 concentration for at least five years now. For the last couple of years, the argument has been centered on the so-called “Magnificent Seven” – Apple (AAPL), Microsoft (MSFT), Nvidia (NVDA), Amazon (AMZN), Alphabet (GOOGL/GOOG), Meta (META), and Tesla (TSLA) – comprising at times nearly 40% of the S&P 500’s weighting. More recently, this has coincided with concerns about a brewing AI and data center bubble.
The table below depicting the top holdings of the SPDR S&P 500 ETF Trust (SPY), as of market close on Friday, May 2, 2025, shows that the weighting is still over 30%. That’s still seemingly high concentration, even after the “Mag7” have been hit hard by the tariff-induced market correction.
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The argument that this S&P 500 concentration risk was unsustainable reached a crescendo early in 2025. Media articles, including those featuring analysts and investment strategists at big banks like Bank of America, Morgan Stanley, and Goldman Sachs, warned of a “bubble” in U.S. growth stocks echoing the dot-com era. It seemed the main commonality among all the articles was that the massive size of the Mag7, as a percentage to the S&P 500, is significantly above historical norms.
For the record, let us just explain that a “bubble” isn’t driven by a company’s bigness. Rather, a bubble is driven by investors running up the valuation of the company (or any asset) far beyond what the business can realistically generate in future cash flows.
Nevertheless, we wrote a simple seven points counter-argument early in 2025, one that we stand by even after the recent market tumult. We think it can help investors develop their own personal framework for investing – one that doesn’t rely on sensational media reports, often funded by the very banks and investment firms featured in them.
- When making calls like “the Mag7’s value making up nearly 40% of the S&P 500 is unsustainable,” what we’re really dealing with is statistics. And the S&P 500’s less than 70 year history is a small sample size – and not just in its length of time. Small sample sizes cannot be relied upon to predict future outcomes.
- More on statistical sample sizes: The overall U.S. equity markets extend far beyond the S&P’s arbitrarily selected largest 500 publicly traded companies (it doesn’t include private businesses, too). The U.S. equity market itself is also just one of many equity markets around the world. And concentration risk is actually quite common, both historically, and across geographies. (Pareto Principle, aka 80/20 Rule.)
- Who is making these calls for a bubble in the media? And why? If you tally up the folks crying wolf, they tend to be active money managers. And active money managers have been hemorrhaging assets under management (AUM) for years at the expense of the indices that are helping create “the index concentration problem.” Consider the incentive someone has for saying what they say.
- If you think in terms of business, not stocks, you could argue “index concentration risk” is a moot point. Maybe big tech like the Mag7 has just been making really good return on investment (ROI) decisions for a long time, and the rest of the S&P 500 business leaders have sucked at it for the last decade or two. And unlike the dot-com or other periods of “bubble,” the Mag7 are very profitable… and I mean real profit, not accounting profit. (For fun, read through the annual reports of three dot-com bubble darlings: Cisco, Lucent, and AOL. By today’s standards, these are mid-cap, maybe large-cap, businesses! Remember what causes a bubble? It all has to do with unreasonable forward expectations embedded in market prices, not concentration risk.)
- If you believe markets are only just semi efficient in assessing information and baking it into asset prices, this ROI problem will work itself out. Other businesses will get with the times, and make more intelligent and data-driven capital allocations. Their valuations will rise, and balance out the “concentration risk.” Why does the market always need to crash in order for there to be better equilibrium (again, consider the incentives of the people making grand sweeping claims). To wit, in the chart shared earlier, there are already new entrants gunning for the top 10 spots in the S&P 500, like the emergence of Broadcom (AVGO) and Netflix (NFLX) which now sits just outside of the top 10.
- If you’re worried about stock concentration risk, consider the fact that in a real bear market, a select group of stocks doesn’t fall. ALL equities across the board tend to be highly correlated to each other, and all fall in tandem. Diversifying across equities doesn’t solve the concentration risk problem.
- If you’d rather not concentrate your risk in a small handful of mega-cap stocks, we get it. If you haven’t noticed it yet, Chip Stock Investor is all about building its own custom index of businesses, ideally held for the long-term if all goes well. Yes, we experiment, and semi-frequently toss out failed ideas and replace them with new ones. But our turnover rate tends to be 10% or less a year on average, a hallmark of passive (indexed) investing… aka “business ownership.” Give it a try, it works. And you’ll experience why concentration risk, if developed organically (the business grows into a concentrated position because of superior growth), isn’t such a bad thing.
That’s a wrap for this walk down memory lane. It’s an especially busy earnings week, so join us on Semi Insider for lots of coverage with our twice-a-week live events, presentations, and Q&A sessions!
