Why Mega-Cap Tech Stocks’ Dominance Is a Risk

Mar 6, 2024

Investing in the S&P 500 today may mean overexposure to a handful of mega-cap tech stocks known as “the Magnificent 7.”

Lisa Shalett

Key Takeaways

  • After years of impressive gains, the “Magnificent 7” stocks today represent 30% of the S&P 500 Index’s market capitalization.
  • These stocks’ historically heavy weights in benchmark equity indices and their high correlations to one another are a risk for investors.
  • Should these stocks revert back to their December 2022 valuations, their market caps could drop by one-third, likely pulling the S&P 500 down 9%.
  • To reduce their risk, investors should consider adding exposure to U.S. bonds and non-U.S. equities, as well as equal-weighted S&P 500 strategies and alternative assets. 

Investing in a stock index like the S&P 500 should, in theory, offer broad and diversified exposure to the market, helping investors to reduce their risk. But many investors are unaware of an issue that has made these kinds of passive investments much riskier than they have been historically.


The stocks of just seven large technology companies, known as the Magnificent 7, have rapidly grown to dominate the S&P 500 Index. They currently represent about 30% of the index’s total market capitalization, a historically high level. Buoyed by ultra-low interest rates for most of the last 15 years and recent enthusiasm around artificial intelligence (AI), these stocks have soared in recent years and, in 2023, accounted for nearly two-thirds of the U.S. equity index’s returns.


While there may be room for these high-flying mega-caps to rise even further, their outsized presence in benchmark indices creates risk for investors. Should even one of them tumble, it could deal a considerable blow to even a cautious investor’s portfolio.

Today’s Market Is Historically Top-Heavy

The Magnificent 7 weigh heavily in both U.S. and global equity indices that are “market-capitalization-weighted,” meaning their largest stocks have the most impact on performance. (These stand in contrast to “equal-weighted” indices, which seek to allocate equal amounts of capital to all of the stocks in the index.) The benchmark MSCI All-Country World Index, for example, consists of nearly 3,000 stocks from developed and emerging economies—yet even it has 20% of its value in the 10 largest U.S. stocks, including the Magnificent 7.


To put the enormity of these 10 companies in perspective, their market capitalization is equal to all listed companies in the UK, France, Germany and Japan combined. A decade ago, their market cap would have made up less than half of that value. 

To put the enormity of the 10 largest U.S. stocks in perspective, their market capitalization is equal to all listed companies in the UK, France, Germany and Japan combined.

Why “Index Concentration” Is So Risky for Investors

Simply put, the more an index is concentrated in a relatively small number of stocks, the less effective it is as a tool for diversification. As a result, investors in such indices may see bigger-than-expected swings in their portfolios.


In particular, investors who have exposure to the Magnificent 7 stocks via passive indices may be at risk for a few reasons.


  • Close correlation: All seven companies belong to the same technology sector, with overlapping business lines. In addition, their returns over the past year have been heavily driven by investor enthusiasm for AI. As a result, if investors sour on AI, or if one stock goes down, the whole group can fall—dragging down the value of the broader cap-weighted index. 
  • Interest rate sensitivity: When rates rise, these growth-oriented stocks are particularly apt to fall in value and vice versa. That’s because unlike with more value-focused stocks, their valuations are heavily predicated on future returns. When rates rise, it instantly raises the bar on far-out profits needed to justify their prices today. We believe rates are likely to stay higher for longer than many investors expect, posing a challenge for the Magnificent 7. What’s more, their relatively high correlation with bonds, which also fall in price when rates rise, may reduce the diversification potential of stock-bond portfolios, such as the popular “60/40.”
  • Sky-high valuations: The Magnificent 7 are extremely pricey, with investors believing these companies can remain profitable under many different economic circumstances. They sport a particularly rich average forward price-to-earnings (P/E) ratio of about 28, compared with the cap-weighted S&P 500’s multiple of around 20. Other metrics, such as “index-relative equity risk premia” (i.e., the extra return an investor can expect for investing in the equity index instead of risk-free Treasury bonds), also show these stocks are historically expensive, leaving less room for gains from here.

What May Come Next?

Given these risks, we believe the cap-weighted S&P 500 has the potential to disappoint investors moving forward.


Our analysis shows that index concentration is rarely sustainable as it tends to rise and fall in multi-year cycles. An index can become increasingly top-heavy due to extended rallies that benefit select themes or sectors, until a big macroeconomic event—like a recession or a change in the direction of interest rates—interrupts the pattern. This sparks an equity selloff that then touches off a shift in focus to a broader set of themes or sectors, causing the index to become less concentrated over time. 

Stocks tend to have far less favorable outcomes in periods of higher relative index concentration—which is where we find ourselves now.

Importantly, this has implications for returns. Our study shows stocks tend to see higher returns when starting from a point of lower index concentration. They have far less favorable outcomes in periods of higher relative concentration—which is where we find ourselves now. Should the macroeconomic winds shift out of the Magnificent 7’s favor or their fundamentals fail to meet investors’ lofty expectations, these stocks—and the broader index—are vulnerable. For example, if the Magnificent 7 stocks’ P/E ratios simply reverted back to December 2022 levels, it would imply a full one-third decline in their total market cap, equating to a 9% drop for the S&P 500.

How Should You Invest?

If these mega-caps do decline significantly and the indices become less concentrated, investors could expect increased volatility for the S&P 500 and other indices. In this scenario, our analysis also suggests that:


  • Broadly, benchmark indices for U.S. fixed income and non-U.S. equities would likely outperform the U.S. stock index.
  • Investors who want to maintain passive exposure to a U.S. equities index should consider the equal-weighted version of the index, which would likely be less affected by volatility among the largest companies. Investors should also consider stock-picking and active management in the short term.
  • Investors may also want to consider “non-correlated” investments, such as hedge funds and real assets, to help further diversify their portfolios.


Connect with your Morgan Stanley Financial Advisor to discuss how you can help mitigate the risks that stock-index concentration may pose to your portfolio. Request a copy of the Morgan Stanley Global Investment Committee special report, “Consequences of Concentration,” from your Morgan Stanley Financial Advisor to learn more. Listen to the audiocast based on this report.

Find a Financial Advisor, Branch and Private Wealth Advisor near you. 

Check the background of Our Firm and Investment Professionals on FINRA's Broker/Check.

More Insights

Insights to help you go further.