The S&P 500 is back notching up all-time highs, capping off what’s been a remarkable rebound.
Things look very different for investors now, who are breathing easier after a rough start to the year.
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However, under the surface of this optimism, there is a hidden imbalance that continues to grow quietly. This risk is likely to turn today’s party into tomorrow’s headache if the momentum swings the other way.
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The Magnificent 7’s hold on Wall Street
Over the past couple of years in particular, the “Magnificent 7”, which includes Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta, and Tesla, have turned the S&P 500 into their personal growth machine.
Back in mid-2023, these mega-caps accounted for a whopping one-third of the index’s market value.
By early 2024, that number grew even more, creeping up to 35%.
That figure is now pushing toward 40%, the highest concentration level in more than 50 years.
It’s not hard to gauge, though, if we look at the scoreboard.
Nvidia is up an eye-popping 936% over the past three years, Meta’s up 326%, Amazon popped 93%, and Apple notched a 44% gain, beating the broader index by a country mile.
Related: Cathie Wood drops bold message on Apple, Tesla stock
Nevertheless, those blockbuster runs supercharged passive portfolios but also rewired the S&P 500.
Critics say index investors aren’t getting true diversification anymore. Instead, they’re loaded by a select few pricey tech stocks that could switch gears in a regulatory crackdown or if earnings miss following a major stumble.
The risks are too real to ignore for savvy investors.
Nvidia’s sky-high valuations continue raising eyebrows (having flirted with $4 trillion market cap recently). Apple faces antitrust probes in Europe. Google’s ad business is under fresh scrutiny. Also, EV giant Tesla’s once-torrid growth has cooled off.
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It’s giving investors flashbacks to the “Nifty Fifty” collapse of the 1970s, when overconfidence in a few blue chips ended in major pain.
Big tech’s sway over the S&P 500 is getting risky
Wall Street giant Apollo has just put out a fresh warning on those holding the S&P 500.
According to Apollo Chief Economist Torsten Sløk, investors looking for the traditional “broad diversification” from the S&P 500 are essentially betting on the Mag 7, which continues powering ahead.
Collectively, these mega-cap titans now account for roughly 40% of the S&P 500’s total market value.
That’s a paradigm shift from what the benchmark index intended to do, which was to spread your risk across 500 companies, sectors, and trends.
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The problem is, when you have just seven names propping up almost half the index, a bad day for Big Tech can result in a massive setback for everyone.
And tech stocks aren’t living in a bubble. They’re effectively linked to consumer spending, interest rates, and geopolitical tensions, and any surprise can rattle these giants quickly.
Think of surprise antitrust crackdowns, AI hype cooling off, or disappointing earnings. Any of those worrying trends could send the Mag 7 sliding, dragging the entire index with them.
It’s no wonder that many strategists are concerned about how it’s shaping their portfolios.
For those worried about the major concentration risk, it will be more fruitful to dig deeper and hunt for smaller caps, dividend payers, or international stocks to look for real diversification.
Apollo’s takeaway is blunt.
Passive index funds aren’t the safety net they once were, and if you’re in the S&P 500, you’re basically betting all-in on Big Tech, regardless of whether you intend to.
Related: JPMorgan delivers blunt warning on S&P 500
