Is the S&P 500 now too risky?

The S&P 500 has long been the most popular benchmark for US equity investing. In recent years it has become even more popular as the incredible success of US-based megacap tech companies has driven US stock markets to ever-greater heights. This has been welcomed by investors in the S&P 500, who have enjoyed very healthy returns of 14.7% per annum over the last 10 years¹.

However, these enviable returns have also had potentially undesirable consequences. They have significantly changed the makeup of the S&P 500 and, according to Bill Nygren and Robert Bierig, portfolio managers from Harris l Oakmark, made it a much riskier place to invest. They say it is now more like a “mega-cap growth fund” than the highly diversified index it used to be.

How the S&P 500 has become more concentrated, and less diverse, over time

One of the main reasons for the enduring popularity of the S&P 500 is its diversity. Diversification of investments is generally agreed to be one of the best ways to reduce risk in an investment portfolio and the S&P 500 is widely regarded as the best way to gain diversified exposure to large-cap US equities. But the outstanding success of large cap technology has reduced the diversification of the S&P 500. It is now much more concentrated in the technology sector and in fewer very large companies at the top of the index.

Bill Nygren, CIO-U.S. and Portfolio Manager for Harris l Oakmark says, the concentration in the tech sector is actually greater than many investors realise. While it is officially around 35% now, it would have been much higher except for a reclassification that happened 15 years ago:

“The S&P 500 arbiters chose to pull some companies out of the technology sector, names that include Alphabet and Meta…Had those changes not been made, Information technology would be at a record high 44%, which is around 5% higher than at the peak of the dot com market 25 years ago.”

The differences in sector diversity can clearly be seen in the graph below. In 2005 there was a reasonably even spread between the sectors, but now technology dwarfs all the other sectors.

S&P 500 Index 20 year ago vs. today

Source: Harris l Oakmark and FactSet, as of 9/30/2025.

*The S&P 500 Index information technology sector includes those names reclassified from information technology to communication services in 2018 and financial services in 2023; Alphabet Cl A, Alphabet Cl C, Meta Platforms Cl A, Fidelity Natl Info Svc, Fiserv, Global Payments, Jack Henry & Associates Inc., Mastercard Cl A, Paypal Holdings, Visa Cl A.

The other aspect of greater concentration is the concentration in fewer names. The four largest S&P 500 holdings now take up more than 25% of the index, whereas 20 years ago they made up 11% of the index. 

Source: Slickcharts, as of 10/31/2025. Alphabet combines A & C share classes. Content provided for informational purposes only and does not constitute legal or regulatory advice.

Interestingly, this now places the S&P 500 over the US Securities and Exchange Commission (SEC)’s limits on diversified funds. The SEC’s regulations state that if all positions within a fund that are greater than 5% add up to a total weighting of more than 25%, then the fund needs to be registered as non-diversified to alert investors to its higher risk level. So at this point in time an actively managed fund can’t fully weight the largest four names in the S&P unless it registers as a non-diversified fund.

What should investors do about this concentration?

Not all types of concentration are bad. If investors believe that the megacap technology stocks will continue to outperform, then it may make sense for them to continue to hold a significant percentage of their investments in the S&P 500 or similar indices. While the change in concentration in the S&P 500 is perhaps most significant, the incredible success of megacap tech stocks has driven similar changes to concentration in other popular indices like the MSCI World, which has also become much more concentrated in fewer stocks and tech stocks, as well as US stocks. However, if investors would like to hold a diversified portfolio of stocks to mitigate their equities risk, then it could make sense for them to relook at their overall allocation to different equities indices and individual stocks.

For investors that would like to retain similar exposure to US stocks, but diversify their holdings more, Robert Bierig, portfolio manager at Harris l Oakmark, suggests that the Russell 1000 Value may be a better fit for them. He says the Russell 1000 Value is better diversified than the S&P 500 on almost every measure. As well as having more companies than ever before in its index, at 870, the Russell 1000 Value is also less concentrated in its largest names and more widely spread from a sector perspective, as can be seen in the graph below.

Russell 10000 Value Index today vs. S&P 500 Index 2005

Source: FactSet, as of 9/30/2025.
*The S&P 500 Index information technology sector includes those names reclassified from information technology to communication services in 2018 and financial services in 2023; Alphabet Cl A, Alphabet Cl C, Meta Platforms Cl A, Fidelity Natl Info Svc, Fiserv, Global Payments, Jack Henry & Associates Inc., Mastercard Cl A, Paypal Holdings, Visa Cl A.

Bierig is also keen to highlight how much the companies within the Russell 1000 have changed over the years:

“I think there's a perception that the Russell Value would primarily be banks, energy, utilities, maybe some dying industrials and even like cigar butt type companies, but that's not what the Index is today. The reality is that the Russell Value of today is a very vibrant index, and several companies that used to be considered entirely growth, for example Amazon, Alphabet, Analog Devices, Salesforce and so on are now included in the Value index.”

Investors could diversify their equity holdings by moving some of the money from their S&P 500 investments into the Russell 1000 Value, or alternatively an actively managed US equity strategy. This could also potentially mitigate another risk of the S&P 500, the high valuation of the index overall. In 10 years the price to earnings multiple of the S&P 500 has increased from 17 times to 23 times². However, as the chart below shows, most of the increase in this earnings multiple is confined to a small number of very successful stocks, the megacap tech stocks. The number of stocks within the S&P 500 that trade below a PE multiple of 14x has remained reasonably stable, at around 150 stocks.

The increase in valuation of the S&P 500 is not evenly spread

Source: FactSet, 12/31/2014-9/30/2025.

This disparity in valuation is of particular interest to Robert Bierig: “It is this part of the market that has us excited about the potential future returns for our portfolio, and I would say, perhaps equally importantly, it has us excited about the diversification benefit that our portfolio brings to investors who have significant exposure to the S&P 500.”

Bill Nygren agrees: “If the megacap AI stocks continue to be the strongest performers, we aren't going to be among your best performers in your portfolio, but I think more important than ever, we're providing a big risk diversifier relative to a core S&P 500 portfolio.”