Mega-Caps Dominate S&P 500, Raising Concentration Risks

As of August 2025, the market landscape has become increasingly dominated by a handful of mega-cap stocks. The "Magnificent Seven" group of Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla now account for around 34% of the S&P 500 index, an all-time high.

This high level of concentration in the index poses significant risks for investors. When these large companies rally, the index can soar, even if many other stocks tread water. However, when the Mag-7 stocks wobble, the entire index can roll over, even if the broader market breadth looks relatively healthy.

Recent data shows that the cap-weighted S&P 500 has outpaced its equal-weight counterpart, underscoring how much the index's performance rests on the leadership of these few names. Experts have noted that when the Mag-7's weight crossed certain thresholds in the past, the S&P 500 went on to stage a short rally before falling roughly 13% over the next two months - a textbook "correction."

Adding to the concerns, the equity risk premium (ERP), which measures the expected return of stocks over risk-free Treasuries, has now slipped toward multi-decade lows. This indicates that stocks are expensive relative to bonds, and forward returns may be thinner.

While this does not necessarily mean investors should rush to cash, it does argue for a more cautious approach and close monitoring of the market's concentration risks.