Markets
Beyond the Magnificent Seven: How to fix the S&P 500’s record concentration risk
By Sherwin Pasha, CFA 29 January 2026 4 min read
- Passive investing has changed: The S&P 500 is becoming less of a broad bet on the economy. With the top 10 holdings now comprising 40% of the index, passive investing has morphed into a more concentrated investment.
- A historical warning sign: This market concentration has significantly surpassed the peak of the 2000 Dot-Com bubble. History suggests that when the top 10 stocks make up close to 30% of the S&P 500, investors tend to get more concerned and selling pressure creeps in.
- Restoring balance is simple: You don't need to abandon the index to mitigate the risk. Strategies like equal-weight indexing can reduce your Magnificent Seven exposure from ~34% to ~1.4%, effectively automating the discipline to buy low and sell high.
For many years, the smartest advice in the room was also the simplest: "Don’t try to beat the market. Just buy the S&P 500." It was the ultimate "set it and forget it" strategy, promising instant diversification across the 500 largest American companies.
But looking at the data as it stands today, the promise of broad diversification has changed.
If you own a standard S&P 500 index fund right now, you aren’t making a broad bet on the American economy. You’re making a concentrated trade on a handful of giant, technology-focused companies. To understand how we got here, let’s look at how the index is built.
The mechanics: How the S&P 500 works
Many investors believe that buying the S&P 500 means owning 500 equal slices of the economy. But the reality is quite different. The index uses a market-capitalization weighting, which means the index assigns value based on a company's total market size (share price × number of available shares). This shows that a 10% move in a massive company like Nvidia impacts your portfolio significantly more than a 10% move in a smaller regional bank, purely because Nvidia takes up more space in the basket.
The Magnificent Seven feedback loop
This system creates a self-fulfilling prophecy where success begets more success. The larger a company becomes, the more of every investor’s dollar it commands. This mechanism naturally pushes the share price of the winners higher and higher.
As of January 2026, the Magnificent Seven (Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia, and Tesla) account for roughly 34% of the entire S&P 500. Broaden your view to the top 10 holdings by adding Broadcom, Berkshire Hathaway, and Eli Lilly, and that concentration swells to 40%. That means for every $1 you invest in the S&P 500, $0.40 goes directly into just ten stocks. The remaining $0.60 is sprinkled thinly across the other 490 companies. You aren't buying the market—you are buying a technology-focused fund concentrated in a few large companies with a side of general stocks.
Source: ATB Wealth
The tipping point
Concentration isn't inherently bad as it drives wealth during bull markets. However, history suggests there is a tipping point where strength becomes fragility.
The data shows us that when the top 10 stocks in the S&P 500 make up close to 30% of the index, the market becomes very sensitive. At 40%, we are sailing well past that threshold, surpassing even the 27% peak (according to Goldman Sachs)1 of the Dot-Com bubble in 2000. During the 1950s and 1960s—the last time the top 10 stocks exceeded 30% of the top 500 companies—the market experienced three separate bear markets with declines of 20% or more.
If the AI trade stumbles, or if regulatory tides turn against Google or Apple, the entire index takes the hit. Furthermore, holding the title of the largest company in the index is rarely permanent. In the 80s, the index was led by IBM and in the 90s, General Electric. In 2010 it was ExxonMobil and in 2015 it was Apple until Nvidia began to hold the lead in 2025. Betting that today's leaders will reign forever ignores the lessons of financial history.
How to mitigate the risk
This concentration risk doesn’t require abandoning the S&P 500. It simply invites a smarter approach to how we weigh it.
The most direct solution is utilizing an equal-weight S&P 500 Index. In this structure, each company is weighted the same at 0.2% each. By design, this approach continually rebalances your exposure, effectively automating the timeless advice to buy low and sell high. Under this method, the Magnificent Seven combined make up only about 1.4%, drastically changing your risk profile. Integrating this strategy can be as simple as directing future contributions to an equal-weight fund or rotating a portion of your current S&P 500 holdings. Of course, selling existing positions can trigger tax events. We recommend consulting with a licensed financial advisor to ensure you choose the most tax-efficient path for your specific situation.
Beyond re-weighting, there is immense value in widening your lens. Because the S&P 500 dominates the headlines, investors often overlook the opportunities in mid-capitalization and small-capitalization indices. These indices allow you to invest in thousands of companies operating independently of the Magnificent Seven. Additionally, many international markets don’t suffer from the same extreme technology-focused skew as the United States does. By broadening your horizon, you reduce your reliance on the performance of a handful of stocks in a single country while building a more diversified and resilient portfolio.
The bottom line
Index investing remains a powerful tool and can elevate returns during long bull markets, but passive shouldn't mean blind. When a broad index becomes highly concentrated, the prudent move is to reintroduce the diversification that the market has stripped away.
“Is the S&P 500 too concentrated?” Goldmansachs.com. March 21, 2024.
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