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A Concentrated S&P 500 – Good or Bad?

by Tyler Ellegard, CFA

Posted on May 21, 2024

In recent years, the top 10 stocks of the S&P 500 have accounted for an increasingly larger share of the index’s total market capitalization. This increasing concentration presents a double-edged sword for investors. While the exceptional performance of these market leaders has driven strong gains, it also introduces heightened risks associated with reduced diversification and potential volatility. 

This level of concentration has been driven by the substantial growth of mega-cap technology and consumer companies including:

  • Apple (AAPL)
  • Microsoft (MSFT)
  • Amazon (AMZN)
  • Alphabet (GOOG)

These companies have reshaped the investment landscape and now have a significant impact on S&P 500 Index performance and valuation. The increasing influence of these companies has implications and creates concerns for fundamental investment themes like diversification, market stability and asset allocation. This growing concentration highlights both the extraordinary success of these firms and the potential vulnerabilities in an index heavily weighted toward a small group of dominant companies. The chart below shows the top 10 stocks by market cap every five years starting in 1980 including an update with the current weightings in 2024.1,2 

It is not unique to have the top 10 S&P 500 stocks account for over 20% of the index, but the companies tend to change over time as newer, innovative companies create substantial value for consumers and their shareholders. However, the current level of concentration in the S&P 500 is at a multi-decade high, surpassing the concentration last seen in late 1990s with the dotcom era shown in the chart below.3

The rising levels of concentration in the top 10 stocks of the S&P 500 has led to those companies having greater influence on the overall performance of the index. 

  • From 1995 to 2018, the top 10 companies in the index contributed a median of 17% to the total return of the index.
  • From 2019 to 2024, the contribution from the top 10 was 44%.

The graph below shows the contribution to total performance in each year from 1995 to 2024.4

The increasing influence of the top 10 stocks on the S&P 500 is raising concern over the true level of diversification in the index. Having diversification in a portfolio reduces the level of risk an investor has towards one specific company or industry. Currently, the index has a rising level of exposure towards technology and consumer-specific companies and more recently, A.I. focused companies.

Typically, new and innovative companies who create a product or service that becomes valuable to consumers begin to grow and overtake older, larger companies who are slow to adjust. However, with A.I. the incumbents have been the beneficiaries as they have the most data and information to leverage A.I capabilities and also the financial resources to create a wider gap between them and all the others.

At Gradient Investments, we believe in diversification as a risk-mitigation tool that reduces the risk of one or few companies having an outsized (and negative) influence that could derail an investment plan. Therefore, we will continue to monitor the size and potential future of these companies and assess how to diversify our portfolios from taking unwarranted risks towards one company or industry. We can do this in several ways, including stock portfolio allocations that do not precisely mirror the S&P 500 index, providing offerings that protect against index decline or invest in asset classes that do not correlate with the performance of the S&P 500.