The Stock Market Is Ultraconcentrated, and It Could Get Worse. Here’s How to Manage the Risks

Over the past few years, just a few large-cap technology stocks have powered the stock market’s returns. That trend shows no signs of abating anytime soon, as demand for artificial intelligence continues to send the tech sector higher.

Why it matters: A highly concentrated market can—and has—turbocharged returns, but it also comes with downsides. As tech stocks soar, fund investors may find themselves with portfolios that are significantly less diverse than expected thanks to the outsize influence of a handful of firms like Nvidia NVDA and Microsoft MSFT. Dominic Pappalardo, chief multi-asset strategist for Morningstar Wealth, discusses how today’s narrow market compares with history and how investors can mitigate concentration risk in their portfolios. Morningstar Wealth is part of a registered investment advisor, Morningstar Investment Management.

8 Questions on Concentration Risk for Investors

1. What do strategists mean when they talk about concentration risk?
2. How did today’s narrow market develop? What forces and trends brought us here?
3. How unusual is today’s narrow stock market compared with history?
4. When the market has been concentrated in the past, what has caused that concentration to dissipate?
5. Are the risks associated with high concentration greater for passive index investors? Why?
6. Wall Street has been warning about concentration risk for the better part of two years. But stocks are still hitting record highs, and the weightiest stocks are still performing the best. Why do some strategists say they aren’t as concerned about concentration risk? Do investors really need to be worried?
7. What are some strategies investors can use to mitigate the risk of a highly concentrated market without leaving too much upside on the table?
8. What’s the most important thing investors should remember right now?

Key Quote on Concentration Risk

The largest names have dramatically outperformed the broad market over the postpandemic period. And as their market value increases, the stock price is going up and they represent a larger and larger share of whatever market index they may be included in...

...The concern would be if the market tone shifts and technology stocks start to lag the broader market, investors will experience an outsize downturn as well. That’s probably something people should be thinking about. I would suspect a lot of investors aren’t aware of how concentrated those investments are right now.

The Takeaway: No one has a crystal ball when it comes to the stock market, and that means no one can predict when—or if—the tech rally will lose momentum. In the meantime, Pappalardo says it’s especially important for investors to understand what funds they own and what stocks those funds hold to make sure their holdings are diversified and aligned with their long-term plan and risk tolerance.

More From Morningstar on Concentration Risk

Strategists widely expected the bull market in US stocks to broaden beyond growth and tech stocks in 2025. Instead, the rally narrowed even further over the summer as the tech sector led the recovery after April’s tariff-induced selloff, Morningstar data journalist Bella Albrecht found.

As a result, indexes like the S&P 500 are increasingly weighted toward a handful of names. The top 10 companies by weight now make up roughly 40% of the market capitalization of that index, according to Pappalardo. That’s a “highly unusual” dynamic compared with history, he adds, and there’s a chance concentration levels could keep climbing amid steady investor demand for tech and AI.

Investors who own other funds beyond the broad index—like growth-focused funds or sector-specific funds—may not realize how much their top holdings overlap, Pappalardo says. The phenomenon isn’t confined to passive funds, either. This summer, Morningstar manager research analyst Vedran Beogradlija pointed out three active funds that have become riskier as large-cap growth stocks outperform.

Investors looking for more diversification can find it in small-cap stocks and international markets, Pappalardo says. Both categories are significantly less concentrated when it comes to individual stocks and sectors.