Investing in the S&P500

The S&P 500 is the most popular index in the world, and buying it through an ETF is often presented as the simplest way to diversify across the US stock market. But diversification depends on how spread out that ownership actually is. As of mid June 2026, it is far less spread out than most people assume.

How concentrated is the index, really

The S&P 500 has a combined market cap of roughly $57.6 trillion across all 500 companies. NVIDIA alone makes up 7% of that total. That is more than entire sectors like energy or utilities combined. Apple follows at 6.3%, Microsoft at 4.6%. Just three companies account for around 18% of the entire index.

Widen the lens to the Magnificent Seven (NVIDIA, Apple, Microsoft, Amazon, Alphabet, Meta, and Tesla) and the picture sharpens further. As of early June 2026, these seven companies have a combined market cap of $22.7 trillion. That is roughly one third of the entire S&P 500's value. Seven companies, out of five hundred.

This is what people mean when they call the S&P 500 top heavy. When someone buys a broad US index fund expecting wide diversification, a large share of what they actually own is concentrated in a handful of mega cap technology companies. Returns increasingly depend on how those few companies perform.

Why concentration matters for valuation

Concentration on its own is not necessarily a problem. It only becomes one if the companies driving that concentration are priced very differently from the rest of the market.

This is where ratios become useful. A company's P/E ratio shows how many years of current profit it would take to earn back the price paid for the stock. When a small handful of companies trade at much higher P/E ratios than the rest of the index, and those same companies make up a third of the index's value, the average valuation of the entire S&P 500 starts to reflect the expectations placed on just a few businesses. Not the market as a whole.

The S&P 500 also trades at a price to sales ratio of roughly 3.5x, while capital expenditure, particularly around AI infrastructure, continues to rise sharply. A rising P/S ratio alongside rising capex is a sign that investors are paying more per dollar of revenue today, partly on the expectation that this spending will turn into future earnings growth. Whether that growth materialises is the actual bet being made.

What to make of it

None of this means the S&P 500 is a bad investment, or that a correction is imminent. Index concentration has happened before, and the index has historically provided broad market exposure even through periods where a handful of companies dominated returns. What it does mean is that buying the market today is not quite the same diversified bet it was a decade ago.

Predictions of a bubble bursting show up in financial media constantly, in good markets and bad, and they are notoriously difficult to time correctly even when eventually proven right. Rather than trying to predict the top, the more useful exercise is understanding what you actually own when you buy an index fund, how concentrated it has become, and what assumptions about future growth are already priced into it.

*This article is for educational purposes only and does not constitute financial advice. Always do your own research before making investment decisions.*