The S&P 500's concentration problem makes the "safe" label hard to defend
Index funds are broadly treated as the conservative default, but two separate lines of evidence suggest the comfort that assumption provides may not be warranted.
The S&P 500 has become the default “safe” choice for millions of investors, but two pieces of evidence aired recently push back on that framing from different directions.
The first is concentration. Michael Batnick’s data shows that six of the eight years in which the top ten stocks contributed the most to overall index gains have all come since 2020. That is not normal dispersion. A portfolio that is effectively a bet on a handful of mega-caps is carrying a different risk profile than the diversified index many investors believe they own.
Six of the eight years at the top of the list where the top 10 stocks contributed the biggest to the overall index has happened since 2020. Michael Batnick
The second is the math of implied expectations. Victor Haghani points out that earnings growth, once adjusted for buybacks and retained earnings, has averaged “a couple of percent per year” over a long stretch despite enormous technological change. If the market is pricing in something closer to 25% annual growth for several years running, corporate earnings would have to climb toward roughly half of US GDP, well above the 6-to-8% historical share. That gap between priced-in optimism and the arithmetic ceiling is worth sitting with.
Neither speaker argues investors should abandon equities entirely. Jared Dillian’s alternative, a five-asset equal-weight portfolio, is one proposed answer. The narrower point is simpler: “there’s nothing safe about the stock market” is a statement the historical record supports, and the current concentration of index gains makes it more relevant, not less.