Market concentration risk in 2025

Nvidia dropped 16.9% in one day on January 27th, losing roughly $600 billion in market value. This was triggered by the emergence of a low-cost competitive AI model developed by DeepSeek. While 328 stocks saw gains that day and the median stock rose 0.7%, the S&P 500 Index still dropped by 2.3% mainly thanks to Nvidia. With exposure to technology in the market-cap-weighted S&P 500 reaching all-time highs, it’s crucial for investors to consider diversification strategies.  

Just how concentrated is the U.S. stock market right now? Although the S&P 500 index is made up of 500 stocks, the reality is that it is much less diversified than it may seem. The Magnificent Seven, a group of high-performing tech companies, now accounts for 33% of the index. Specifically, Nvidia alone has a greater index weighting than five of out of the S&P’s eleven sectors—making it responsible for roughly 2/3 of the index’s decline on Monday. The cap weighting structure of stocks trading at such high premiums presents a significant concern for investors heading into 2025.

One option to mitigate concentration risk is to switch to an equal-weighted index, like the S&P 500 Equal Weighted Index. Diversifying with mid- or small-cap U.S. stocks may also offer relief from concentration risk while supporting the broader U.S. exceptionalism narrative. Lastly, incorporating fixed income into a portfolio could potentially provide a good hedge against equity market volatility.  

Although the events on Monday highlighted some of the risks within the U.S. equity market, it’s important to remember that U.S. large cap stocks generally have very strong fundamentals. The S&P 500 companies still demonstrate elevated profit margins and robust cash flow generation, especially when compared with their peers in other countries. Moreover, the potential for higher corporate profits remains intact.  

Julia Rozenfeld contributed to this article. All data sourced from Bloomberg.