According to Morningstar, the top 10 stocks in the S&P 500 now account for over 37% of the index’s total weight—an all-time high as of early 2024 (Morningstar, 2024). For an index often seen as a proxy for broad U.S. market exposure, this level of concentration raises a simple but uncomfortable question: is the S&P 500 still diversified?

Many investors assume that owning an S&P 500 index fund means owning a slice of the whole economy. But the index is market-cap weighted, not equally weighted—meaning larger companies dominate its movements. This article explores how that structure can distort diversification, especially during tech booms or busts.

Key Takeaways

• The top 10 S&P 500 companies represent over a third of its market cap—making it highly top-heavy.
• Sector exposure is skewed: technology and communications now drive much of the index’s performance.
• A market-cap-weighted index inherently concentrates more as certain stocks outperform.
• Diversification by name count does not equal diversification by risk contribution.
• Some investors may consider complementing the S&P 500 with other asset classes or weighting methods.

The Concentration Effect: What the Index Doesn’t Show

The S&P 500 includes 500 companies, but a handful of mega-caps dominate due to market-cap weighting. As of the end of 2024, the top five stocks—Apple, Nvidia, Microsoft, Amazon and Alphabet—made up about 29% of the index. The top ten accounted for roughly 37% of its total weight.

• Hypothetical: Consider an investor who believes they own a balanced portfolio simply because they hold an S&P 500 ETF. In reality, their equity risk is heavily tied to a small number of tech giants. If those companies stumble, the entire portfolio feels it—even if 495 other names stay stable.

From Dot-Com to AI: Tech Dominance Isn’t New

In 2000, at the peak of the dot‑com bubble, technology stocks accounted for approximately 33% of the S&P 500’s market value—one of the highest sector concentrations on record. The S&P 500 then took nearly seven years to fully recover.

Today’s rally is again driven by tech—especially AI-related optimism. While innovation drives growth, history suggests that extreme concentration can backfire if sentiment shifts or regulation tightens.

So what? Relying solely on the S&P 500 means investors may be repeating an old cycle: overexposure to momentum stocks during euphoric periods.

The Hidden Cost of Market-Cap Weighting

Market-cap weighting magnifies winners—and punishes laggards. This creates a feedback loop:

• Winning stocks attract more inflows
• Their weight in the index rises
• Passive funds buy more of them
• Price momentum continues (until it doesn’t)

This structure works well in bull markets, but can be a liability in downturns. For example, in 2022, the S&P 500 fell more than 18%—but the tech-heavy Nasdaq dropped over 30%. Investors in the S&P 500 weren’t immune.

A Market Feature, Not a Flaw?

That said, not everyone views this concentration as a problem. Many analysts argue that the S&P 500’s design naturally rewards strong, established companies—essentially functioning as a dynamic filter for leadership. As underperformers fall in rank, they’re replaced by newer or better-positioned firms, making the index momentum-sensitive by design.

From this perspective, the index isn’t broken—it’s optimized to track where market value and innovation are actually concentrated. For long-term investors, this can provide efficient exposure to the most resilient and competitive players in the U.S. economy.

How Investors Can Stress-Test Diversification

Name count and sector coverage don’t guarantee true diversification. Risk contribution—the share of portfolio volatility driven by individual assets—is a more accurate lens. Some investors may explore alternatives such as:

• Equal-weight S&P 500 ETFs
• Multi-factor funds that reduce exposure to momentum
• Adding non-U.S. equities or real assets

These approaches may help reduce overreliance on a single sector or theme.

The Rebalancing Insight

A simple annual rebalance or position cap (e.g. 5% max per stock) can prevent excessive risk buildup. Behavioral traps—like letting winners grow unchecked—often lead to unintentional concentration.