A Journey Through the Dark Side of the Moon: The Concentration of U.S. Large Caps

The Great Gig in the Sky: The Euphoric Rise of U.S. Large Caps (2009-2025)

(That soaring vocal improvisation? It’s the market’s siren song, luring investors to heavenly highs while whispering warnings of the inevitable fall.)

There’s rarely been a better time to invest in the U.S. stock market, especially in its most common proxy, the cap-weighted S&P 500 Index (SPY/VOO/IVV/SPLG), than the last 16 years. With the exception of a few corrections and jolts (think Covid panic and the steep rate hikes that accompanied post-pandemic inflation), it’s been mostly straight up. It’s a chart pattern to the clouds. Perhaps to the “Great Gig in the Sky.” Born in the aftermath of real fear (Great Recession and its many casualties), well-above-average gains in the S&P 500 and even more parabolic gains in the Nasdaq 100 (QQQ) have extinguished fears brought on by a severe financial crisis and perhaps even fogging memories of the dot-com bubble’s burst at the dawn of our young millennium. Is this heaven? Maybe not, but it might feel like it for the domestic indexer/Boglehead!

“And I am not afraid of dying, you know,
Any time will do, I don’t mind
Why should I be frightened of dying?
There’s no reason, you’ve gotta go sometime”

Make no mistake, born out of despair and lost hope, the U.S. large cap complex, led by technological innovators that produced robust earnings for their faithful shareholders, ventured out of the “lost decade” of 2000-2009 (a ten-year span that saw the S&P end up about where it started) to put on a fifteen-year performance that was truly angelic. Most investors bought tickets to the great gig in the sky and have been rewarded to the tune of about 13.8% annual average returns in the S&P 500 (2010-2024) (600% compounded with dividends reinvested) during this command performance. For those with closer seats to the growth complex—Nasdaq 100 tickets (QQQ)—it’s been even more of a rocket ride to the tune of 16.8% annual average returns (2010-2024) (873% compounded with dividends reinvested, wow!).

As the great gig in the sky got fully into gear, investors coined a phrase for the VIP section of this secular growth: The Magnificent Seven (Mag 7). Fifteen-year returns are not available for the Mag 7, because not all of these megacap growth stocks were even public companies in 2010. However, VIP ticketholders in the Mag 7 complex have been rewarded, somehow, with even more heavenly gains over the past decade: an astonishing 38.43% 10-year annualized return for the period ending January 6, 2026!!!

In the rearview mirror, fear of dying, or losing those returns, has been folly. As with any great secular bull market, there have been periods where fear crept into markets, only to shake out those whose faith would succumb to whatever fear du jour prevailed (think taper tantrum, pandemic onset, War in Ukraine, rate-hike frenzy, liberation day shock, etc.). To date, reacting to threats to this run have only muted investor returns. Let’s be more honest here (compliance permitting, sigh): To date, diversifying out of the U.S. stock market and its trillionaire Mag 7 leaders has been a painful exercise! That’s the hallmark of true market euphorias—discipline goes out the window and true diversification feels like an audio malfunction during the greatest concert of your life… a major buzzkill.

On the Run: Chasing the Mag 7 Sprint While the Pack Falls Behind

(Those frantic footsteps and manic laughter? It’s the sound of portfolios racing after the leaders, blind to the cliff ahead.)

Looking forward—Still On the Run or finally time to Breathe (In the Air)? The $61 trillion (the total market cap of S&P 500 companies at the end of Q4 2025) question is: Where do we go from here? Is this the final curtain call for supercharged outsized gains in the U.S. mega cap growth complex? Will 2026 and, who knows, 2027 bring this gig to even greater heights? Things look pretty good for the leadership in that complex in terms of revenue and earnings growth, in terms of product demand, and in terms of unbooked (unrealized) gains on those shares. The most bullish arguments sound persuasive, led by the chorus of how early stages the development and mainstream implementation of artificial intelligence, quantum computing, and blockchain technology might be. Who doesn’t love market analogies to sports (we’re in the second or third inning, the first or second quarter…)?!?!

“Live for today, gone tomorrow
That’s me”

In other words, why worry about the future when there’s real money to be made? It’s a very rock n’ roll way to look at life… and investing.

However, we’re financial planners who generally don’t incorporate the “die young and leave a good looking corpse” philosophy into clients’ financial plans or the investment strategies that forge key assumptions within those plans. Accordingly, if you were looking for a segue into “The Show Must Go On,” that’s the same artist, but another album entirely!

Unfortunately, investing is never this easy… indefinitely. If we take a collective breath (Breathe, breathe in the air) and take an objective step back from all this winning, there are genuine reasons to be concerned about what comes next, or, if not next, sooner rather than much later. Objectively, there are cracks in the argument that this bull run, and its core leadership embodied by the Mag 7, can and will persist for a considerably longer period of time. In the short run, sure, but all good shows end. Market shows like this current epic run are special and rare, but akin to several secular bull markets of the past in the S&P 500 complex. Spoiler Alert: Those all ended, eventually. That’s obvious and not particularly alarming to the investors dancing carefree to the tune of a euphoric bull market. However, the sobering lessons of history aren’t that these prior secular bull markets in the S&P 500 ended, but what the S&P 500’s performance looked like in the aftermath—the years following the end of all prior secular bull runs in the S&P 500 of similar scale and magnitude: real DARK SIDE!

We’ve been talking a lot about concentration risk lately, and for good reason. The way most portfolios are built—especially those tied to broad market indexes—has quietly funneled a massive share of exposure into just seven names.  As of December 31, 2025, Apple, Microsoft, Nvidia & Co. still hog 34.3% of the S&P 500. One dollar in every $2.50 you “diversify” into the index is riding on seven horses. History is clear: the Nifty Fifty, dot-com darlings, FAANG 1.0—every sprint ends eventually. When it does, cap-weighted investors may get trampled. As Alicia pointed out in her 2024 market outlook piece regarding the S&P 500, out of the top 10 companies in 2000, “Only one of these companies, Microsoft, is still in the top 10 today.”

While we could go over the various metrics of valuation and come to somewhat different conclusions on where the S&P 500’s current valuation ranks to prior historic valuation peaks, the cyclically adjusted price to earnings ratio (CAPE) is often used as a good barometer of relative valuation of an index (as opposed to individual stock CAPE ratios) when comparing valuations relative to historic norms because it adjusts to eliminate the cyclical variables that differ between different time periods. It’s also difficult to use expected earnings because different analysts can certainly come up with different earnings projections and, therefore, wildly different expected P/E ratios. In October 2025, the S&P 500’s CAPE ratio crossed over 39 (39.5 actually) for only the second time in history. The index’s historic average CAPE ratio has been around 16 over the past 70 years. What was the other time the CAPE crossed 39, you might be wondering? January of 1999, where it remained above that mark for 22 straight months until the late 2000 popping of the internet bubble. 

“And balanced on the biggest wave
You race towards an early grave”

The use of CAPE ratio as a tool to accurately predict market tops or imminent crashes may be debatable. What is far more clear at this stage is that concentration in the S&P has now smashed all prior market boom levels. As of December 31, 2025, the top ten largest companies in the S&P 500 now represent 40.7% of the entire index, according to year-end data from J.P. Morgan Asset Management. To put that percentage in perspective, the Economic Times noted that the dot-com bubble of the 1990s saw the concentration of the ten largest member companies peak at 29% before the eventual bear market led by profound stock losses in the megacap growth complex. It’s very hard to ignore that 42% figure and conclude that it shouldn’t sound some alarm bells for indexers that believe they get enough stock diversification from an S&P 500 index fund. It’s not as diversified as it used to be, by a considerable margin.

Time: Flattening the Curve Before the Bell Tolls

(That ticking clock and distant bells? It’s the market’s reminder that no run lasts forever—time to reset before the alarm rings.)

Given these two warning signs in the cap-weighted S&P 500 index:

• The index is at or near historic levels of valuation; and
• The Index has concentrated leadership beyond all comparable historic levels

it seems only logical for investors to assess whether they are riding this biggest wave without a lifejacket. Before that wave collapses, it’s time to breathe in the air. This doesn’t necessarily mean that investors need to rush to the stock market emergency exits. It is more than reasonable, though, to conclude that it is prudent to be objective and breathe in the air, to balance the natural emotional tug of war between greed and fear, and chart a path forward that protects some of the incredible investment gains from this generational bull market in the U.S. megacap growth complex. This can and should involve continuing to participate in future potential upside, while at the same time recognizing that leadership in the securities markets meaningfully shifts over longer periods of time.

Equal-weight and factor-based funds may help set the rebalance alarm clock. RSP, an equal-weight ETF, has beaten SPY (a S&P 500 ETF) in 61% of rolling 5-year windows since 2003 (Invesco). The drawdowns are 4–6% shallower on average as well, providing ballast when concentration falls out of favor. You’ll lag while the seven are flying, but you’ll still be standing when the clock strikes rotation. There are other options with ETFs and funds as well to help reduce concentration risk, including factor-based funds, actively managed funds, and simply adding more small or mid-cap funds into an allocation.

“Ticking away the moments that make up a dull day
Fritter and waste the hours in an offhand way
Kicking around on a piece of ground in your hometown
Waiting for someone or something to show you the way”

Perhaps we have already seen some meaningful shifts in the securities markets in this past year and the plants of traditional diversification are starting to bear fruit again. In this respect, 2025 may mark a turning point in the major investment markets. While U.S. stocks trailed both gold and foreign stocks through much of 2025, a dominant fourth-quarter surge allowed the S&P 500 to narrow the gap, finishing the year with a robust 17.9% return that outpaced most major international markets. Even within the S&P 500, there is a definitive broadening out of the bull market that should not be ignored in 2025. Although Communication Services and Technology were the top-performing sectors of 2025, finishing the year up 33% and 24% respectively, Industrials was the only other sector to outperform the overall S&P 500, delivering a robust 19.5% return for the year. There are indeed other places to dig those holes and shelter some of these fantastic gains!

Breathe: Giving Taxable Accounts Room to Inhale Without the Tax Choke

(That deep, calming inhale? It’s the relief of smart strategies that let your portfolio expand without gasping for air under tax burdens.)

“Run, rabbit run
Dig that hole, forget the sun
When at last the work is done
Don’t sit down, it’s time to dig another one”

That rabbit digging holes is a fairly spot-on metaphor for diversification, spreading your securities into multiple holes or asset classes to avoid getting burned in the hottest group or individual holding. It is an ongoing, disciplined process. Those haunting lyrics suggest a degree of urgency, which seems more than merited today if the lack of diversification is acute.

Taxable accounts also may be facing significant headwinds, as the push-pull between asset allocation and taxation can be a constant battle. Do you sell winners to rebalance and hyperventilate into a federal tax bag? You probably should, but there are also some potential solutions you may want to explore before just accepting the higher tax bill and biting the bullet. Digging holes isn’t usually pleasant or painless. For investors with large gains in the sun and particularly in a sunny taxable brokerage account and/or employer stock plan, there are costs to bear and taxes to pay. It’s intoxicating to watch those sunny stocks when prices keep going higher and higher, and sobering to actually undergo the process of digging those holes of diversification and paying capital gains as the price of doing the right thing. But if history repeats, or at least rhymes, that could end up being a small price to pay compared to the cost of doing nothing.

“Breathe, breathe in the air
Don’t be afraid to care
Leave but don’t leave me
Look around, choose your own ground”

Some solutions we are using:

1. Direct indexing: Holding individual stocks versus ETFs or mutual funds can provide you with a lot more control of how, and when, to recognize taxation. Simply put, if you own 300 stocks in your portfolio you have a greater opportunity to manage gains and losses than when you have one fund that does not give you many options to manage gains when it’s up significantly.
2. 130/30 overlays: Taking direct indexing to the next level, 130/30 (or other iterations like 200/100) overlays allow us to amp up loss harvesting. A 130/30 strategy, for example, acts like it has $130 invested for every $100 you give it. It gets the extra $30 by borrowing shares it thinks will fall, selling them short, and using the cash to buy even more of the stocks it loves—giving you bigger upside (and downside) than a plain-vanilla fund, all while staying roughly market-neutral on the short side. Think of it as direct indexing on steroids: 130% betting on winners, 30% betting against losers, to allow for more frequent loss harvesting opportunities. This may be a good fit for investors with concentrated portfolios that wish to significantly reduce their position within a few years. Note that with financing costs, these carry more fees than traditional direct indexing.
3. Section 351 ETFs: Swap some of your big winners for global names, equal weighting, or tracking a broad index without having to recognize immediate capital gains. This is a little-known way to get some major diversification quickly while deferring the tax bill, but pay attention to the Section 351 rules and understand that these are nothing like classic “exchange funds” with huge minimums and equally huge fees. Rather, this is a tax-advantaged way to participate in the seeding of a brand new ETF at its launch and few ETF managers have adopted this intriguing technique to attract capital … yet.
4. Asset location: Consider placing corporate bonds, REITs, and other income-oriented investments into IRAs; private, crypto, precious metals, or other high-risk investments into Roths; balance taxable accounts across tax-free investments such as munis while holding some individual stocks for tax management and growth (likely with direct indexing). Where your assets are placed is an often-overlooked part of asset allocation, as the measure of success should not solely be rate of return—it should be after-tax rate of return.
5. Stock collars: Sometimes we see clients with extremely concentrated positions with large unrealized capital gains. Utilizing options, we can help minimize single-stock risk by “collaring” the portfolio to provide downside protection—there’s no free lunch here, you do mute your upside as well.

Money: The Bottom Line on Balancing Euphoria and Reality

(That cash register cha-ching and cynical riff? It’s the cold reminder that all gigs end, and smart money prepares for the encore—or the exit.)

We’re thrilled with the last five years—S&P up 15% annualized—but 39% in seven stocks is a moonshot that can go dark fast. Equal-weight, long-short, and tax-smart buckets may help soften the blow and prepare yourself for the likely scenario that we don’t see the outsized returns in the Mag 7 throughout the coming years. It’s best to prepare now when it is sunny outside rather than in the midst of a downpour.

“Money, get away
Get a good job with more pay and you’re okay
Grab that cash with both hands and make a stash”

In the end, the market’s highs can feel like a great gig, but the lows remind us to diversify globally for steadier returns. By blending the euphoria of the run with the prudence of diversification, we can navigate the dark side without losing our way.