The

S&P 500

is often viewed as a diversified benchmark, representing a broad cross-section of the

U.S. economy

. But today, that perception is increasingly misleading. The index has never been more concentrated in just a few names than it is right now which introduces risks investors can’t afford to ignore.

Nvidia Corp.

alone currently represents nearly eight per cent of the S&P 500, the highest weighting for a single stock in the index’s history. Nvidia and

Microsoft Corp.

together account for nearly 15 per cent, and adding

Apple Inc.

brings the top three to 21 per cent. The top 10 stocks now make up a record 40 per cent of the index, surpassing the 27 per cent peak seen during the dot-com bubble in 2000. Yet these companies only generate about 30 per cent of the index’s total earnings, highlighting a growing disconnect between price and fundamentals.

The illusion of diversification

When a handful of companies dominate index performance, the illusion of broad-based strength can mask growing fragility beneath the surface. In a well-diversified market, a negative surprise from a single company — such as an earnings miss or regulatory issue — would typically remain contained. But in today’s environment, a stumble by one of these giants can ripple across the entire market. Passive flows and algorithmic trading amplify such moves, turning what should be an isolated event into broader volatility.

This dynamic blurs the line between idiosyncratic and systemic risk. It’s not that systemic volatility originates from concentration but rather that concentration makes the system more fragile, allowing localized shocks to cascade through the broader market.

History may not repeat, but it does rhyme

We’ve seen this movie before. In the 1970s, the “Nifty Fifty” stocks were considered bulletproof. Investors paid sky-high multiples for perceived quality and growth. But when inflation surged and growth slowed, many of these stocks collapsed, dragging the broader market down with them.

In the late 1990s, the dot-com bubble saw tech stocks dominate the S&P 500. Companies with little revenue and no profits traded at astronomical valuations. When the bubble burst in 2000, the Nasdaq lost nearly 80 per cent of its value, and the S&P 500 entered a multi-year bear market.

Even the FAANG era of the 2010s — referring to Facebook (now Meta), Apple, Amazon, Netflix and Google (now Alphabet) — showed signs of fragility.

While those companies were profitable and innovative, their dominance masked weakness in other sectors. When tech sentiment cooled in 2022, the broader market suffered despite strength in areas like energy and industrials.

What makes today different and riskier

Today’s concentration is driven not just by performance, but by structural forces. Passive investing now accounts for more than 50 per cent of U.S. equity assets, and momentum-driven strategies often reinforce narrow leadership, which can persist for longer — but also unwind faster.

Moreover, many of the top companies are exposed to similar macro risks: regulatory scrutiny, geopolitical tensions and AI-driven disruption. If one falters, others may follow not because they’re fundamentally weak, but because they’re priced for perfection.

A return to stock picking can be a more resilient approach

The solution isn’t to abandon the S&P 500 but to look beneath the surface. Investors should consider returning to good old-fashioned valuation discipline and stock picking, as we’ve done recently by adding to some of this year’s underperformers, such as Berkshire Hathaway Inc. and Alphabet Inc.

With a diversified portfolio spanning consumer staples, energy, financials, and insurance, Berkshire Hathaway functions like a quasi-mutual fund providing defensive positioning in volatile markets. Its largest holding, Apple, benefits from reduced tariff risk in India, and the company is taking a distinct approach to AI. Rather than building standalone AI products or chatbots, Apple is embedding intelligence directly into its ecosystem by enhancing apps like Messages, Mail, Photos and Siri with contextual, privacy-first AI features. This strategy aligns with Apple’s long-standing focus on seamless user experience and ecosystem cohesion.

Berkshire also holds more than US$347 billion in cash, giving it unmatched flexibility to deploy capital or buffer against downturns. Despite strong fundamentals, Berkshire has lagged tech-led rallies, creating a relative value opportunity. In my opinion its low correlation with broader markets and strong operating businesses make it a stabilizing force in our client portfolios.

Alphabet has been another strategic buy for us. The company is investing US$85 billion into AI and cloud infrastructure, including the acquisition of Wiz to bolster cybersecurity. Its core businesses — Google Search, YouTube and Google Cloud — continue to post double-digit growth, yet the stock trades 11 per cent below fair value, offering a nice margin of safety.

Google Cloud’s profitability and backlog signal durable enterprise demand, while Alphabet’s AI features are driving more search queries and ad impressions. With diversified revenue streams and global scale, Alphabet is well-positioned to compound growth over the long term.

These are just two examples of many, as we think investors who focus on intrinsic value — cash flows, balance sheets and sustainable growth will be better positioned to weather volatility and capitalize on dislocations than simply buying the S&P Index itself.

Final thought

Market concentration isn’t inherently bad. Many of today’s leaders are exceptional businesses. But when too much depends on too few, the system becomes fragile. As we’ve seen time and again, diversification isn’t just a strategy, it’s protection. And in a market increasingly driven by momentum and passive flows, that protection is more important than ever.

  • Markets may have stabilized but as you enjoy the ride don’t lose sight of the risks
  • If managing investment risk makes me conservative, I’ll wear it proudly

Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus.