The S&P 500 Isn’t as Diversified as It Looks

The S&P 500 is often described as a broad barometer of the U.S. stock market. It tracks 500 large public companies and is widely used as a benchmark for retirement accounts, index funds, and long-term investing. In theory, the index represents the performance of the overall corporate economy.

But a recent analysis shows that the index is far less diversified than most people assume.

What the S&P 500 Is Supposed to Measure

The S&P 500 is designed to reflect the collective value of the largest companies in America. Because it is weighted by market capitalization, the biggest companies exert the most influence over its performance. For many retirees and workers who invest through 401(k)s and IRAs, this index is effectively “the market.”

What the New Reporting Reveals

Recent reporting shows that a small group of tech companies—the “Magnificent Seven”—now make up roughly one-third of the entire index. As economist Torsten Slok notes, that leaves the S&P 500 heavily reliant on the continued strength of these companies.

When analysts say “the market is up,” they may be describing the rise of seven companies rather than broad gains across all 500. The remaining 493 companies tell a more mixed story, with slower growth and greater sensitivity to interest rates and trade policy.

Why This Matters for Fiduciaries and Retirees

This concentration changes how risk works inside portfolios that rely on “broad market” exposure.

• Diversification may be less robust than it appears. An index fund holding 500 companies may seem balanced, but its results can depend heavily on a small cluster of tech giants.
• Planning assumptions may need adjusting. Fiduciaries and retirees using index-based projections should understand that the index’s performance is increasingly driven by a single sector.
• Volatility risk becomes more concentrated. If one of these dominant companies slows down or experiences a setback, the entire index can move sharply—even if most of the other companies are stable.

Understanding this structure helps fiduciaries, trustees, and retirees make more informed decisions about risk and long-term planning.

For readers interested in related market conditions, see my earlier post: What To Do When Markets Look Frothy.