The hidden risk behind tech giants dominating S&P 500

Is the S&P 500 truly diversified? Michael Gayed, publisher of The Lead-Lag Report, joins Stocks in Translation to explore whether the S&P 500 (^GSPC) still qualifies as a truly diversified index. He highlights that a few select stocks are currently driving a majority of the momentum. As he puts it, "When a rising tide does not lift all boats, everybody drowns."

Listen to the full episode here, or wherever you get your podcasts.

For more expert insight and the latest market action, click here.

This post was written by Neil Mulcahy.

Video Transcript

It's debatable as to whether the S and P 500 is really a diversified index anymore, right?

When you've got a slight number of stocks that are driving the entire momentum play across the board.

Um the reality is most stocks are still trading below their 2021 highs.

So it looks like a bull market, but it looks like a bull market because it's really a concentration bubble where you have some of these large cap tech names driving pretty much the entire performance that's worked.

If you're an index investor, obviously, the problem and the risk there is that now you're not playing the market, you're playing individual companies, right?

And that concentration risk means you have much more what's called idiosyncratic company specific risk, which could become problematic, right?

I mean, lay out any scenario China invades Taiwan, what happens to NVIDIA and what happens to the semiconductor trade?

Maybe NVIDIA actually goes up more, right?

And MS even more as a result, right?

It could be because now they're the only ones left standing.

Um But the point is that it's not a good thing when you're at a point where a rising tide uh is not lifting old boats.

Uh I've used that line before on X when a rising tide does not lift all boats, everybody drowns.

There's always an aspect of the parado principle.

8020 driving, return the small number of things.

But you're at a point where it's like the parade of the parado.

It's like the 8020 within the 8020.

And, and I think that's not a, a healthy thing.

I also think it's somewhat reflective of the economy.

Right.

You only have a small number of, uh, participants generating all the wealth.

Everybody else is still feeling like it's a recession.

Uh, it, it's, it's a microcosm of a much bigger issue.