Market Concentration: Why the S&P 500 Is Not the Whole Market
One of the most common conversations I’ve had with clients over the past year has been the market concentration we’ve seen in the S&P 500. The JP Morgan Guide to the Markets slide below does a great job in capturing the unprecedented level of concentration. From 1985 through 2015 it was common for the ten largest companies in the S&P 500 to be 20% of market capitalization. To put in more concrete terms, historically if you invested $100,000 in an S&P 500 index fund or ETF, $20,000 would be invested across ten names with $80,000 invested with the other 490 companies. Today, nearly $40,000 would be invested in the top ten companies and $60,000 in the rest.
If someone is only invested in the S&P 500, that means 40% of their wealth is allocated to ten companies. That doesn’t feel very diversified, does it?
Source: JP Morgan Guide to the Markets, Data April 30, 2026
I don’t think so, but my reasoning has nothing to do with market concentration leading to poor returns or if AI is a bubble. It’s that the S&P 500 should not be mistaken for the entire market to begin with. Let me explain.
Short History Lesson
People have always known about concentration risk with old sayings such as, “Don’t put all your eggs in one basket,” coming to mind. But it wasn’t until the 20th century that academics and investors started using mathematics to measure concentration and reduce the risk that any single investment could derail someone’s entire portfolio. This revolution really started with Harry Markowitz who observed that different securities have different levels of volatility and that a basket of these securities can have less volatility than any individual security.
William Sharpe and others would take this a step further by identifying systematic and unsystematic risk. Unsystematic risk is the risk associated with any individual company. Think the shareholder wealth destruction of GE or IBM for the past 25 years. Systematic risk, by contrast, is market risk as a whole. What Sharpe showed is that since individual securities move in different directions (Markowitz) you can diversify their company specific risk away so all that remains is market risk, which is risk that can’t be diversified away.
The key takeaway being that diversification is not just owning many things. It is owning enough different sources of return that one company, one sector, or even one country does not dominate the outcome.
The Market Portfolio
If you’re concerned about concentration risk in the S&P 500 you are probably worried about a decline in the performance of a handful of companies harming your financial plan. So, we need to address two things:
You need public stocks. If you want to earn the stock market’s 8-10% historical annualized return, we need to accept some level of risk. A rational investor in search of these returns must accept market risk, but they do not need to accept unnecessary company-specific concentration risk.
Fortunately, if you are worried about the size of a handful of companies in the S&P 500, the S&P 500 is not the market portfolio you should be invested in, so more of that company risk can be diversified away than you may have thought.
While the S&P 500 is one of the most quoted indices on TV, it should not be our starting point when thinking about our ideal diversified portfolio. For starters, the S&P 500 doesn’t represent the entirety of the U.S. market. If we simply expand our definition of the market to include medium and small companies in the U.S., we reduce the concentration of the top ten companies in our portfolio from 40% to 36%. Not much of a change, but it’s a start. The largest benefit will be expanding our definition of the market to include companies outside of the United States.
Source: Dimensional Fund Advisors, Data December 31, 2025
The U.S. has the largest weighting of publicly traded companies in the world, but we still only make up 62% of world market cap. There are thousands of other companies that make up the true market portfolio. By incorporating a global market mindset we can reduce the top ten largest companies in our portfolio from being 40%, if we were only invested in the S&P 500, to 22%.
The weighting of these large companies is again reduced if we consider other asset classes. I’ve spent most of the time discussing weightings as if someone was investing 100% in public companies. This makes sense for young investors or goals with a long time horizon, but we typically start to allocate some percentage of the portfolio to bonds the closer we get to retirement. A traditional retirement portfolio of 60% stocks and 40% bonds that takes a global perspective on the stock market has a 13% allocation to the S&P’s ten largest companies.
Source: S&P 500, Data VOO May 26, 2026 ; Global Stocks, MSCI ACWI IMI Index (USD) Fact Sheet April 30, 2026
Conclusion
If you are only invested in the S&P 500 but don’t feel diversified, your intuition might have been telling you something important. Fortunately, by returning to the fundamentals and expanding our definition of the market to global companies, we can meaningfully reduce the level of risk for any single company in our portfolio. This diversification is not a prediction that today’s largest companies will fail or underperform. It is humility about our ability to know which companies, sectors, or countries will lead next.