The S&P 500 has become more top-heavy over the years, raising concerns for investors. In this blog post, we will dig into the reasons behind the top-heavy market, its historical context, and the importance of staying diversified.

Big Tech Leading The Way
As we progress into 2023, a handful of the largest tech stocks within the S&P 500 have outperformed the broader index by a significant margin. Take these giants out of the index, and it’s easy to see a large difference in returns.

Big tech companies (Apple, Microsoft, Amazon, Google, Nvidia, Tesla, and Meta) are up over 56%. In contrast, the remaining 493 companies in the index have only seen a 2% increase.

Historical Perspective
While the level of stock market concentration might seem extreme, it’s not entirely a new phenomenon. Throughout history, there has consistently been a large concentration in the largest stocks.

Since the S&P 500 is a market cap weighted index, the largest stocks play a crucial role in determining the overall market performance. As such, it is not necessarily a negative development that the largest and most successful companies are leading the stock market.

Risk of Owning the Largest Stocks
One might be tempted to invest exclusively in the largest stocks, given their recent outperformance. However, there are two primary drawbacks to this strategy: volatility and turnover.

For example, one of the largest stocks, Nvidia, has seen drastic price fluctuations. Last year, Nvidia declined over -66% from its high. In hindsight, it may seem easy to hold through the declines, but many stocks never recover.

This volatility contributes to the high turnover amongst the largest stocks. It’s rare for the 10 largest stocks to maintain their position for an extended period. This is completely normal as newer, more profitable companies take the lead.

Here are how the largest S&P 500 holdings have changed over time: 

Bottom Line
The growing concentration in the stock market, particularly within the S&P 500 index, warrants investor attention. While chasing the hottest names may yield short-term benefits, it can prove costly when market conditions shift. Maintaining a diversified portfolio is crucial for mitigating these risks and providing resilience in changing market environments.

George Maroudas, CFP®

George Maroudas, CFP®

Twitter @ChicagoAdvisor

Disclaimers/ Sources
Big Tech Leading The Way from George Maroudas. Data from YCharts.
Top Heavy Index from eToro
Top 10 S&P 500 Holdings from Ben Carlson

Stock investing includes risks, including fluctuating prices and loss or principal. This information is not intended to provide specific advice or recommendations about any stock nor is it intended to be a recommendation to buy, sell or hold any stock investment. We suggest speaking with your financial professional about your situation prior to investing.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice.