For decades, the S&P 500 has been the yardstick by which portfolios, mutual funds, and even entire investment strategies are judged. It’s often considered the most reliable proxy for “the stock market” and, by extension, the U.S. economy. But beneath the surface of this widely trusted index lies a concentration risk that should give investors pause—particularly in today’s tech-driven market.
The Illusion of Diversification
The S&P 500 includes 500 large U.S. companies across multiple industries, creating the impression of broad diversification. Yet the index is market-capitalization weighted, meaning the largest companies exert the most influence. Today, the so-called “Magnificent Seven”—Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta, and Tesla—make up roughly 31% of the index’s total value.
The problem? These companies don’t just dominate the index—they move together. Their stock prices tend to rise and fall in unison, largely driven by trends in technology adoption, interest rates, and investor sentiment toward growth stocks. That correlation means the S&P’s performance is far more tied to the fate of the tech sector than many investors realize.
Why This Matters for Benchmarking
Using the S&P 500 as your sole performance benchmark can lead to distorted conclusions. In years when tech stocks soar, a portfolio heavy in more balanced holdings—like value stocks, small caps, or international equities—might appear to “underperform” simply because it isn’t riding the same concentrated wave. Conversely, when tech falters, the S&P’s weakness may unfairly penalize an otherwise well-diversified portfolio in relative comparisons.
Benchmarks are meant to provide context. But if the S&P 500’s performance is disproportionately shaped by a handful of correlated companies in one sector, then it’s no longer a neutral yardstick—it’s a tech-sector barometer.
Lessons From History
We’ve seen the dangers of concentration before. In the late 1990s, tech stocks swelled to outsized portions of major indexes, driving eye-popping returns—until the dot-com bubble burst. Portfolios tied too closely to the prevailing benchmark suffered deep losses, while those with broader diversification weathered the storm more effectively.
The same principle applies today: sector dominance can amplify both gains and losses, and investors who over-rely on a benchmark like the S&P 500 may find themselves inadvertently concentrated in a narrow slice of the market.
A Better Way Forward
The solution isn’t to abandon the S&P 500 altogether—it remains a valuable tool for understanding large-cap U.S. equities. But investors should:
- Pair it with complementary benchmarks such as equal-weighted indexes, small-cap indexes, or global indices.
- Look beyond relative returns and evaluate absolute performance against specific goals.
- Diversify intentionally, rather than assuming the S&P 500 does it for you.
The S&P 500 is still a benchmark worth knowing—but it should no longer be the only one we use. In a market increasingly dominated by a handful of powerful tech firms, investors owe it to themselves to dig deeper than the headline number and ensure their strategies aren’t anchored to a benchmark that may not reflect their true objectives or risk tolerance.
Have a blessed week!
Joe Shearrer
Opinions voiced above are for general information only & not intended as specific advice or recommendations for any person. All performance cited is historical & is no guarantee of future results. All indices are unmanaged and may not be invested directly.
The economic forecast outlined in this material may not develop as predicted & there can be no guarantee that strategies promoted will be successful.
Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.