It is no secret that the U.S. equities market is highly concentrated. According to data from State Street Investment Management, the highest-performing stocks make up 38% of overall market capitalization—more than double the 17% from a decade ago. For the past few years, that 38% has been largely distributed between the so-called Magnificent Seven stocks, but in recent months, much of the growth is coming from one name—Nvidia Corp.
This is not the first time equities have been highly concentrated. Similar trends were observed during the 1995 to 2000 tech bubble or during the “Nifty-Fifty” period of the 1960s and 1970s. What is different is the scale of the companies involved. Nvidia, for example, is the first company to reach a $5 trillion valuation, putting it ahead of other trillion-dollar peers such as Apple Inc. and Microsoft Corp. That growth is boosting portfolio performance for investors, but it also raises questions about risk management and whether market structure may evolve in response to the sheer size of the largest companies.
“We view market concentration as the tinder for volatility, not necessarily the spark,” says Jordan Rizzuto, CIO of systemic manager GammaRoad Capital Partners. “Concentration can persist for months or even years. But I think the reason why it’s getting so much attention right now is that we’re arguably late in the market cycle, and market concentration has been a condition that’s present at every major secular top of the market over the last century.”
Rizzuto adds that alongside these market conditions, the majority of marginal dollars coming into the market are going into the biggest companies through passive index funds. The largest passive funds are concentrated as well—among three asset managers—and bring in billions of passive dollars each month through automated 401(k) investments and self-directed investor contributions.
Taken together, these data points might look sufficient on paper for investors to want to position more defensively. However, Rizzuto says that can be challenging. It is never clear when a correction will actually happen, and given that these conditions can persist for years, investors risk trading away upside.
Hedges Uncertain
Alongside the capital flows that the biggest names attract, Rizzuto says more asset managers are buying near-dated call options on these stocks. When a dealer sells the call option, they also buy the underlying stock to hedge their exposure. That creates multiple streams of demand for the same stocks, driving concentration higher. If volatility increases alongside these trends, that can lead to a more abrupt sell-off in the biggest companies.
The concentration of assets in passive large-cap funds is also playing a role in how effective some hedges might be. Recent sell-offs have been bought up quickly by funds that buy equity-market dips, which creates a cycle with the expectation that growth stocks will tick higher soon, even if a sell-off starts. That trend can prompt investors to keep holding growth names or increase allocations on the dip, which then increases concentration.
“The issue with passive is that it can create a lot of friction,” explains Jim Masturzo, a partner in and the CIO of multi-asset strategies at Research Affiliates. “People think the asset flows simply keep pushing names up based on where they are in the index. But it’s not just that, these names are getting bigger than they probably otherwise would. And investors might hold on because they are buy and hold investors, or they don’t want to realize the capital gains tax, for example. That comes alongside active investors holding because they expect more upside and aren’t taking profits right away. So we see different types of activity and now the expected growth rates are far beyond what these companies are likely to achieve. That’s probably going to lead to some type of a pullback and reordering but it’s hard to forecast when that happens.”
Jay Kloepfer, director of Callan’s capital markets research group, says the challenge for institutional investors is that they can de-concentrate their portfolios, but that means creating tracking error and moving away from market trends—a posture that can be a hard sell to trustees and boards.
“You will do better when the market goes down—there is no doubt,” Kloepfer says. “But how do you address it in the meantime?”
Active management is typically the way, he says. But that can create its own challenges, depending on target allocations and investment beliefs.
“There are a lot of institutions out there that are used to holding this much equity risk,” Kloepfer says. “They may not be moved to change in these conditions.”
Refocusing on Diversification
Typically, when valuations are as high as they are in 2025’s top 10 stocks, it can prompt investors to seek out diversification, if for no other reason than almost everything else looks cheap by comparison. Sources say investors are asking more questions about global stocks, as well as small- and mid-cap U.S. companies, but a big rotation has not started yet. “FOMO is high,” Kloepfer says, noting that the biggest names could still press higher.
“I think every investment manager and investor has had the thought ‘should I just be 100% Nvidia right now?’ over the past few months,” says Christopher Tessin, the founder of and managing partner in Acuitas Investments. “It’s hard to escape that feeling, but if you look at the history of financial markets, you know that’s not a sustainable view to take, long term.”
Acuitas is a multi-manager firm that evaluates portfolio managers focused on small and micro-cap companies. Tessin says there are a lot of opportunities in that part of the market to add diversification and realize upside, but it requires active management and discipline.
“You have to really know what you own and do the work of understanding drivers of return,” he says. That requires more work than passive allocations to the biggest growth names, which can be a tough sell in a market that feels bullish, he notes.
“Career risk is a meaningful factor for a lot of investors,” adds Masturzo. “We’ve been concentrated for a while now, and if investors moved earlier, they would’ve missed out on some of the growth.”
Opportunity for Upside
Still, some investors are beginning to make moves. Alessio de Longis, head of asset allocation for Invesco Solutions, says the firm has increased allocations to small- and mid-cap stocks, as well as to value stocks, as part of its most recent round of portfolio changes, in part because of how concentrated the broader equities market is right now. He says diversification is important and adds that there are new tailwinds, including supportive fiscal policy, which could bolster stocks broadly beyond just the top performers.
“We think a rebound in cyclicals is probably likely as well,” de Longis says.
Investors looking for upside may also want to diversify to take advantage of other opportunities.
“So much of the forward earnings growth of the biggest companies has already been front run,” de Longis adds. “Many companies have strong valuations, and there is a greater opportunity for upside in the names that [currently] aren’t getting as much attention.”
Hayley Tran, managing principal in and head of equity research at Meketa, agrees. Meketa is really focusing on portfolio construction with clients, according to Tran. There are valuation gaps between different market segments, to be sure, but the right reaction depends on total portfolio construction and the risk/return profile.
“It’s a balancing act,” Tran says. “But we advise a total portfolio approach that looks across benchmarks and tries to focus on all-weather-type construction. Not everyone is going to come to the same conclusions about what that translates to in terms of portfolio actions. Investors have different goals, different risk tolerances, that are hopefully built into their current portfolio construction. It can be worthwhile to use times like this to do a full look-through and evaluate what you own and make sure you’re still comfortable with the overall approach.”
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Tags: Callan, concentration of risk, Equities, Invesco, Magnificent Seven, Meketa, Nifty Fifty, Research Affiliates, Volatility