Here's what's necessary to return the incredibly concentrated U.S. stock market to normal levels

By Steve Goldstein

Stock markets are out of balance at the moment.

D.E. Shaw, the renowned number-crunching hedge fund manager, calculated how long it would take for the concentrated U.S. stock market to return to normal.

The quick answer: it'll take a while.

For the weight of the ten largest companies in the S&P 500 to return to the pre-2020 average of 20.8% from 40.7% in December, the rest of the index would need to return more than 160%, if the top stocks were to remain flat.

"Given the scale required for full reversion, it seems likely that markets could remain highly concentrated for some time," the firm said in a new article it posted.

The stock market this year has taken a tentative step in becoming less concentrated.

The equal-weight version RSP of the S&P 500 is up 6%, while the weighed version SPX - the one that is most commonly tracked in index funds and on news sites - has gained 2%.

The Magnificent Seven grouping of top stocks MAGS has dropped 4% this year.

During periods of elevated concentration, most stocks should be negatively correlated with the largest stocks - that is, they should fall when the largest stocks rise, and rise when the largest stocks fall.

D.E. Shaw points out that's what happened, when comparing the period from 2010 and 2016 with the period from 2017 to 2025.

Their researchers' point was this imbalance affects risk management. They even mused that a fund manager might want to have two benchmarks - one for the top grouping of stocks, and then another for the rest - though they concede it would cause "operational complexities."

-Steve Goldstein

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02-26-26 0522ET