The S&P 500 has long been a cornerstone of many investment portfolios — and for good reason. It provides low-cost exposure to many of America's largest and most successful companies.
But owning 500 companies doesn't necessarily mean your investments are as evenly diversified as the number might suggest. The index is weighted by market value, so the largest companies carry far more of it than the smallest — and the gap between them is wider now than for most of the index's history.
How Concentrated Is the S&P 500?
The S&P 500 is weighted by market capitalization. As companies become larger, they represent a larger percentage of the index.
As of August 2026, the ten largest companies represented roughly 40% of the entire S&P 500 — against an average of about 25% over the past 30 years, according to S&P Dow Jones Indices.
This means that when you invest $100 in an S&P 500 index fund today, about $40 is effectively being invested in just ten companies — a group that includes the megacap technology names often called the Magnificent Seven.
That isn't necessarily a reason to avoid the S&P 500. Many of these companies are highly profitable global businesses that have earned their large market values.
But it does mean investors should understand what they actually own.
Why Concentration Cuts Both Ways
The growth of America's largest technology companies has been an important driver of U.S. stock-market returns. Investors who held broad U.S. indexes benefited tremendously from that growth.
The other side of concentration is that a relatively small group of companies can have an increasingly large influence on portfolio performance.
If those companies continue to perform well, concentration can help returns. If they experience a period of weaker performance, the same concentration can become a source of additional volatility.
This is one reason I believe diversification should extend beyond simply owning hundreds of stocks. It is also why our investment approach starts with what a portfolio actually holds rather than how many holdings it has.
Are U.S. Stocks Expensive Right Now?
Another consideration today is valuation.
After years of strong U.S. equity performance, valuations across broad U.S. stocks are historically elevated: the S&P 500's cyclically adjusted price-to-earnings ratio stood near 42 in August 2026, against a long-run average close to 17, based on Robert Shiller's data. That doesn't mean U.S. stocks are about to decline, nor does it mean investors should abandon them.
Valuation is a poor short-term timing tool.
Instead, it is another reason to consider maintaining exposure to different parts of the global market, including international developed markets, emerging markets and smaller U.S. companies.
Different markets don't move in lockstep, and leadership changes over time. Rather than trying to predict which country or market segment will outperform next, diversification allows investors to participate across them.
Are Emerging Market Index Funds Any More Diversified?
Not necessarily — diversification requires looking beneath the surface.
Emerging-market indexes provide exposure to economies including Taiwan, China, India, South Korea and others. But these indexes have become increasingly concentrated as well.
As of August 2026, Taiwan Semiconductor Manufacturing Company (TSMC) — one of the world’s most important semiconductor manufacturers — represented roughly 15% of the MSCI Emerging Markets Index on its own, according to MSCI.
That is a reminder that an index's name doesn't always tell the complete story. Whether we're investing in the S&P 500, international stocks or emerging markets, understanding the underlying exposures matters.
Does This Mean Selling U.S. Stocks?
No. The goal isn't to predict that international stocks will outperform U.S. stocks next year — or that today's largest American companies are destined to underperform.
It's about acknowledging that we don't know.
A diversified portfolio can combine U.S. large-cap stocks with smaller U.S. companies, developed international markets, emerging markets and, depending on an investor's circumstances, high-quality bonds and other diversifying assets.
There will always be a part of a diversified portfolio that isn't performing as well as something else. That's part of the design.
Investing isn't about finding the one market that will perform best next. It's about constructing a portfolio that doesn't require us to know the answer.
How We Think About This at Azul Private Wealth
Our approach is centered on long-term investing, broad diversification and building portfolios around each client's individual goals rather than short-term market predictions. If you'd like to talk through what your own portfolio actually holds, we're happy to start that conversation.
This material is provided for informational and educational purposes only and should not be considered individualized investment advice. Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results.