- Michael Allison, CFA
- Jan 18
- 2 min read
By Michael Allison, CFA
Performance, Construction and Diversification
You’ve probably seen headlines crowning NVIDIA as the unstoppable force powering the stock market in 2025. It was the largest contributor to the S&P 500 Index’s total return last year, a title it earned not by being the best performer, but by performing reasonably well and being the biggest company in the index. That’s the message of the first Chart this week.
Here’s the nuance that most financial media coverage misses: NVIDIA wasn’t even in the top decile of 2025’s S&P 500 constituents (Source: YCharts). 74 S&P 500 stocks outperformed NVIDIA last year. Yet because of its gargantuan index weight, the stock still ranked #1 in contribution to index performance, a reminder that size can trump performance in a market-cap weighted index.
Let that sink in: 74 stocks beat NVIDIA in total return, but the stock carried the market more than any other stock because it’s nearly 8% of the index all by itself.
Broken Concentration
While we picked on NVIDIA, highlighting it as an example of the impact one stock can have on S&P 500 performance, the second Chart this week shows just how concentrated the index has become.
When most investors invest in the S&P 500, they believe they’re buying a diversified basket of 500 companies. The reality is much narrower.
The top 10 stocks now command around 40% of the index’s market cap, a level never before seen.
More strikingly, only about 44 names are driving the index’s returns, the lowest effective number of contributors in roughly 35 years.
Having a handful of mega-caps rowing the boat is not very effective diversification, in my opinion.
This dynamic explains why the S&P 500 can climb even when most of its constituents aren’t breaking new ground. Passive flows reinforcing the largest weights, combined with the sheer scale of tech earnings and buybacks, create a feedback loop that elevates a few names to de facto market leadership.
Mag Seven Reality Check
The so-called Magnificent Seven: Apple, Microsoft, Alphabet, Amazon, Meta, Tesla, and NVIDIA dominate the market narrative. But even here, performance is mixed: only two of the Mag Seven outperformed the S&P 500 in 2025, reminding us that sheer size and media messaging don’t always align with performance outcomes.
So How Does This Resolve Itself?
What feels like 500 stocks can behave like 40 — or fewer. In markets where concentrated leadership can both elevate and destabilize, understanding the mechanics behind why the index moves matters just as much as what moves it.
It seems to me that this concentration situation can resolve itself in one of two ways:
Mean Reversion: The mega-caps underperform significantly, taking the overall market down with them and passive flows reverse, which would exacerbate equity declines.
Leadership Broadens: The mega-caps underperform, but not by so much that they tank the market, allowing everything else time to catch up, likely outperforming significantly and passive flows continue to support equities.
If the goal is more effective diversification, investors should shift to broader exposure to other indices, geographies and asset classes.
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