Nvidia, Apple, Microsoft, Amazon, Alphabet, Meta, and Tesla — the so-called Magnificent Seven — are hoovering up nearly a third of every dollar you invest in the S&P 500. Sounds impressive, but it comes with a catch: concentration risk.
When a handful of stocks dominate the index, history shows it’s bad news for long-term returns.
Goldman Sachs’ model predicts returns of just 3% over the next decade if you keep putting your money in this index, which is weighted by market cap. Instead, it predicts you could make a cool 8% if you put money on the S&P 500’s healthier sibling: the equal-weighted index, in which your dollar is shared equally among all stocks.
It’d be a heartbreak to move away from the OG index, which is on track to post 20%-plus gains for two consecutive years. But the shift is already underway. The Invesco S&P 500 Equal Weight ETF gained 4.5% in the past month, outpacing the S&P 500 ETF’s 3.4% gain.
Valuation red flags
It’s not just about concentration though — valuations are stretched. The S&P 500 trades at 22 times forward earnings, which is well above its long-term average of 16x. That’s uncomfortably close to the dot-com bubble levels seen in 2000. While that’s not a surefire crisis signal, it raises questions about sustainability.
The Mag 7 owe much of their rally to last year’s AI boom but replicating that kind of growth without another seismic event (a la ChatGPT) will be tough.
Goldman sums it up succinctly, quoting Acadian Asset Management Senior Vice-President Owen Lamont: “If you want to worry about something, worry about the overvaluation of big growth stocks, not concentration.”
Big tech rules
The problem with that is, it’s hard to bet against Big Tech.
These companies boast cash-rich balance sheets, consistent profits and years of market-beating growth. But they are not invincible, and the S&P 500’s dominance by the Mag 7 could ultimately lead to more volatility than reward.
The question isn’t whether you’re willing to move camps — it’s whether you can afford not to. Your move.
