The S&P 500 index is a benchmark used to gauge the broader U.S. market. Its 500 large-cap and megacap components come from every sector of the economy, and reflect investing categories from value to growth. As those companies account for about 80% of the value of the U.S. stock market, the S&P 500 makes a fairly good proxy for it.
However, each company's weight in the index is proportional to its market cap, and some companies have in recent years grown so big that now, just a few have a disproportionate amount of influence over it. Today, more than one-third of the S&P 500's value comes from just eight companies.
The "Fateful Eight"
If you follow the market, it should be no surprise that the broader market has become concentrated. High-flying tech and artificial intelligence stocks surged in price, with their gains offsetting hundreds of underperformers in the S&P 500 and carrying the index to a roughly 26% broader gain in 2024 (as of Dec. 27). Over the last two years, the S&P 500 is up by more than 55%. Here are the eight stocks that now make up roughly 34.4% of the market and their weights in the S&P 500:
1. Apple (AAPL -1.32%): 7.66%
2. Nvidia (NVDA -2.09%): 6.71%
3. Microsoft Corp (MSFT -1.73%): 6.37%
4. Amazon (AMZN -1.45%): 4.16%
5. Meta Platforms (META -0.59%): 2.57%
6. Tesla (TSLA -4.95%): 2.48%
7. Alphabet (GOOGL -1.45%) (GOOG -1.55%): 2.24%
8. Broadcom (AVGO -1.47%): 2.24%
The first seven names have become known as the "Magnificent Seven" due to their massive market shares in their industries, their fortress balance sheets, and their incredible technological innovations. However, after Broadcom's market cap recently surged past the $1 trillion mark, a group of Wall Street pundits added it to the pack, dubbing the expanded group the "Fateful Eight." Their performances this year have (with one exception) been extraordinary.
Every stock in the Fateful Eight except Microsoft outperformed the S&P 500 in 2024. In fact, all of those other seven have at least doubled the gains of the broader market. However, consider that 168 stocks in the S&P 500 are down for the year, while more than 70% of the names in the index have underperformed it.
Does this make the broader market risky?
Some might wonder if investing in the broader market is safe considering that such a large proportion of its gains have come from such a narrow group of companies. Many of the Fateful Eight trade at nosebleed valuations, making them more vulnerable to pullbacks if they deliver weak earnings or miss their guidance, or if inflation reignites. After all, Treasury yields have marched higher, and many investors pared back their expectations for interest rate cuts in 2025.
One assumption is that the market's gains will eventually broaden. If the lofty valuations on the Fateful Eight normalize, the rest of the stocks in the S&P 500, which generally trade at cheaper valuations, could appreciate, offsetting the impact of that normalization. However, some market strategists now view these big tech names as defensive plays, assuming that in an economic environment featuring more inflation and fewer interest rate cuts, mere mortal companies will suffer and investors will flee to safety in the Fateful Eight.
These are interesting dynamics, and I do not know what the future holds. However, I think it's important for investors to understand that when they look at some metrics intended to reflect the broader market, the picture they present is not as diverse right now as it usually is. Because of that, the S&P 500 could be susceptible to a big pullback due to its high concentration in tech mega-caps stocks. Risks remain because inflation could reignite, and a recession is also not out of the question, although economic data does not currently suggest one is imminent.
For investors who are concerned about the concentration risks in the S&P 500, one option would be to invest in a fund like the Invesco S&P 500 Equal Weight ETF (RSP -0.68%).
Every quarter, equal-weight funds rebalance their holdings back to a condition where each company in the portfolio accounts for the same share of the total -- an even weighting not based on market cap. Equal-weighted S&P 500 funds have vastly underperformed standard S&P 500 funds this year, but they would be more resilient if the members of the Fateful Eight experience a pullback, or if the market's growth from here shifts toward the stocks that have been laggards lately.