The U.S. stock market continues to scale new highs, yet beneath the surface lies a structural issue that wealth advisors and portfolio managers should watch closely: extreme concentration in the largest names. According to Morningstar data, the ten biggest companies in the S&P 500 now account for roughly 40% of the index—an unprecedented level of dominance.
For advisors guiding high-net-worth clients and institutional portfolios, the implications are clear. When such a small cluster of firms dictates so much of the market’s direction, portfolio risks increase significantly. Upside can be substantial if these companies continue delivering strong earnings and maintaining growth leadership. But the downside risk, should just a handful of them stumble, is equally magnified.
The Concentration Challenge
Dominic Pappalardo, chief multi-asset strategist at Morningstar Wealth, emphasized that this moment of concentration looks particularly fragile because eight of the top ten companies fall squarely into the category of technology or technology-adjacent firms.
“The vast majority of the top 10 are all very likely to move together,” he explained. “If one or two of these tech names deliver disappointing results in the coming quarter, it’s very likely the others will trend lower as well. The selloff could be synchronized, leading to an outsized impact on the index as a whole.”
He noted that the post–Liberation Day sell-off earlier this year serves as a cautionary reminder. At that time, these same mega-cap technology stocks led the market downward in lockstep, reinforcing just how vulnerable investors are when performance hinges on a handful of correlated companies.
For RIAs and wealth managers, this isn’t just a market-structure observation—it has direct implications for portfolio construction, risk modeling, and client communication. Concentration risk magnifies volatility, narrows diversification benefits, and heightens the importance of sector exposure decisions.
Why a Pullback Wouldn’t Be Surprising
With the S&P 500 hovering near record levels, Pappalardo suggested that a near-term pullback would not be unexpected. Importantly, he clarified that he does not anticipate an imminent recession, but he outlined two macroeconomic forces that could stall or even derail the current rally: labor market weakness and persistent inflation.
Both issues require close monitoring, as they directly influence Federal Reserve policy, market sentiment, and earnings forecasts—all of which flow through to portfolio positioning.
The Labor Market as a Pressure Point
Job growth has been notably sluggish over the past several months. The most recent reports for May, June, and July reflected historically weak employment gains, raising concerns about the durability of consumer demand. Since consumer spending drives roughly 70% of U.S. GDP, wealth managers should consider how a slowdown in employment could ripple across corporate earnings and equity valuations.
Investors will gain further clarity in the Bureau of Labor Statistics’ payrolls report due September 5. A sustained trend of lackluster hiring would add pressure on the Fed to remain accommodative but would also increase the risk that lower rates are compensating for deeper economic weakness.
Pappalardo underscored this distinction. “If the Fed is cutting rates simply because it wants to sustain expansion while the labor market holds up, that’s supportive for equities,” he said. “But if the cuts are driven by concerns that the economy is weakening to a point where intervention is necessary for long-term stability, that’s not a positive backdrop for risk assets.”
For advisors, the message is clear: rate cuts are not inherently bullish. The rationale behind them matters, and understanding whether monetary easing is driven by proactive growth support or reactive economic weakness will shape how markets interpret policy actions.
Inflation’s Stubborn Presence
The second major risk is inflation, which has proven stickier than expected. The July Consumer Price Index showed a 2.7% year-over-year increase, while Core Personal Consumption Expenditures—the Fed’s preferred measure—rose 2.9%. Both remain above the Fed’s 2% target, complicating the central bank’s policy trajectory.
Tariffs are a key factor feeding into these inflation numbers. Higher input costs for businesses and higher consumer prices are the inevitable outcome of such trade policies, Pappalardo explained. “There’s no question tariffs have increased prices for businesses and consumers. That’s just a simple fact,” he noted.
If inflation pressures persist, the Fed could be forced to maintain a more restrictive stance, undermining the case for multiple rate cuts. This would weigh on economic activity and limit the upside potential for equity markets already trading at elevated valuations.
For wealth advisors, the challenge is twofold: inflation erodes real returns and constrains central bank flexibility, while also creating sector-level winners and losers. Companies with pricing power or exposure to secular growth trends may withstand higher costs, but interest-rate-sensitive sectors and consumer-driven businesses could struggle.
The Broader Macro Backdrop
Between concentration risk, labor market uncertainty, and sticky inflation, the macro environment presents both risks and opportunities. Markets are forward-looking, but they are also increasingly reactive to incremental data releases. For advisors, this means portfolio positioning must remain nimble and diversified, balancing exposure to growth sectors with hedges against potential drawdowns.
Volatility, while subdued in recent months, may reemerge quickly if any of these risks escalate. Advisors should prepare clients for heightened swings and emphasize the importance of long-term discipline, even when headlines turn negative.
Portfolio Strategy Considerations
Pappalardo suggested several avenues for diversification to counterbalance the dominance of mega-cap technology stocks:
-
International Equities: Global markets remain underowned by U.S. investors relative to their long-term contribution to global GDP. Valuations are more attractive, and exposure to non-U.S. economies provides a hedge against U.S.-centric risks such as domestic inflation and policy shifts.
-
Small-Cap Equities: While more volatile, small-cap stocks offer access to different segments of the economy, often more domestically focused, with potential upside if economic conditions stabilize. Valuation spreads between large- and small-cap equities are historically wide, presenting an opportunity for selective exposure.
-
Healthcare Sector: With earnings potential, favorable demographic tailwinds, and relatively low valuations, healthcare represents a sector that can provide both growth and defensiveness. For advisors, this sector offers a way to diversify away from technology while still accessing innovation-driven opportunities.
-
Fixed Income Positioning: While not highlighted as directly by Pappalardo, the interplay between rate cuts, inflation expectations, and yield curve dynamics means fixed income allocations warrant close scrutiny. Duration management, credit quality, and the role of bonds as ballast against equity volatility should all be part of the conversation.
Communicating With Clients
For RIAs and wealth managers, translating these risks into client conversations is critical. Many investors have grown accustomed to the outsized role of Big Tech in driving returns, particularly over the last decade. Yet the very success of these companies has created new vulnerabilities.
Advisors should frame the conversation not as a call to abandon technology, but as a recognition of concentration risk. Clients should understand that while the sector remains a powerful growth engine, diversification is essential to mitigating correlated drawdowns. Stress-testing portfolios against scenarios of weaker labor markets, stubborn inflation, or synchronized tech selloffs can provide a more tangible sense of potential risks and the value of diversification.
The Bottom Line
The U.S. stock market’s historic dependence on a handful of mega-cap technology companies has created both extraordinary gains and elevated risks. With the top ten companies now accounting for 40% of the S&P 500, the market has never been more concentrated.
Morningstar’s Dominic Pappalardo warns that this structural imbalance, combined with macroeconomic risks from the labor market and inflation, could challenge the durability of the current rally. For wealth advisors and RIAs, the task is clear: balance participation in growth with prudent diversification, communicate transparently with clients about risks, and position portfolios to weather both upside surprises and downside shocks.
By broadening exposure to international equities, small caps, and sectors such as healthcare, advisors can reduce dependency on Big Tech while still capturing attractive opportunities. In an environment where concentration risk and macro uncertainty loom large, thoughtful diversification and disciplined risk management will define the advisors best positioned to guide clients through the next phase of the market cycle.
