By Alex Funk, CEO of PortfolioMetrix
Market concentration in the US is high: 10 companies represent about 40% of the S&P 500. That level of concentration hasn’t been seen since 1965. It’s the kind of statistic that makes otherwise rational investors start eyeing the exit door.
It looks like a warning sign, but we’ve been here before. In 1965, the market’s giants were AT&T, General Motors, DuPont, Standard Oil and Kodak. They were dominant. Essential. Untouchable.
Three eventually went bankrupt and the rest shrank dramatically in influence and size. Yet $1 invested in the S&P 500 in 1965 has grown to roughly $400 in total return terms since. The index leaders changed have completely, yet the index kept compounding.
Leaders change and the index evolves
Every era produces companies that become giants. Strong performance builds confidence, and that confidence turns into conviction. Conviction quietly turns into extrapolation and investors the world over begin to assume that what has been true recently will remain true indefinitely. But history suggests otherwise.
Market leadership has rotated roughly every 10 to 15 years for more than six decades. Energy dominated in the 1970s. Japan represented nearly half of global equity value in 1989; today it is less than 5%. Technology surged in 2000, collapsed, and later returned in a different form. Financials led before 2008.
Even the individual stories are sobering. Cisco briefly became the most valuable company in the world in 2000 but has still not reclaimed that valuation. Nokia once controlled 40% of global handset sales and later lost almost all its peak value. These were strong businesses. Their issue was not quality but the belief that leadership would persist without interruption. They were simply priced for permanence.
See also: M&G’s Chowdhury: What counts as a safe haven now?
There is an older example that makes the point even more clearly. In 1900, the US stockmarket was heavily concentrated in railroads. Rail made up roughly 63% of US market value at the time. Today it represents less than 1%.
That is a change beyond market leadership. Yet rail as an industry still delivered strong long-run returns, even as its dominance faded and newer transport technologies emerged. The lesson we can take is that market structure evolves, leadership rotates, and long-term compounding does not require investors to forecast which giants will still be the giants decades from now.
What allows the market to move through these transitions is structural. A cap-weighted index does not forecast the next winner. Instead, it gradually reduces exposure to shrinking companies and increases exposure to growing ones. As yesterday’s leaders fade, tomorrow’s leaders rise. The mechanism adapts even when investors struggle to, which is why the index compounds when its giants do not.
The hidden cost is reaction
Periods of heavy concentration often coincide with elevated confidence. When a handful of companies drive most of the returns, it is easy to conclude that they are simply better, stronger and more durable.
Sometimes they are. But what tends to get overlooked is that the market already knows this. When expectations rise, valuations rise, and from that point the future has to exceed already high assumptions.
Research from Hendrik Bessembinder found just 4% of US stocks created 100% of the net wealth generated by the US market over the long run. The remaining 96% collectively matched Treasury bills. If only a small minority of companies drive most long-term returns, and no one can reliably identify them in advance, then broad diversification is essential.
The real problem arises when investors try to respond to concentration rather than understand it. Periods of narrow leadership tend to invite forecasts, strong opinions and portfolio shifts. Yet history shows that the biggest drag on long-term wealth has not been market concentration or even bear markets. It has been investor behaviour.
See also: The high volatility global funds that doubled your money over the past five years
Dalbar’s long-running research captures this clearly. In 2024, the S&P 500 returned 25%, while the average equity investor earned materially less. Over multi-decade periods, the gap between market returns and investor returns has been even wider. The difference is investors’ instinct to reduce exposure when uncertainty rises and increase exposure once confidence returns.
Let compounding work
The market does not reward investors for correctly naming today’s giants. It rewards those who remain invested when tomorrow’s giants emerge. Concentration comes and goes, leaders rise and fall, but most importantly the index continues adapting and compounding through each transition.
The giants will change again. They always have. The only question that matters is whether investors will still be compounding when they do. Compounding is a function of time, and any interruption, no matter how rational it feels in the moment, is mathematically destructive.
