Index Funds Led By Just a Few Tech Stocks

Funds tracking the movements of major indexes like the S&P 500 and NASDAQ are supposed to be safe. Yet, because they’re weighted according to market cap, these funds are too lopsided for any reasonable person to call them “safe.”

Plenty of commentators have expressed this concern, though others have celebrated the ascendance of the so-called “Magnificent Seven” in recent years. Looking at it objectively, though, it’s not particularly encouraging to see seven stocks propping up indexes consisting of 100 or even 500 stocks.

It’s even worse because the “Magnificent Seven” stocks are all in the same sector, more or less. If the technology sector comes under pressure, all of the high-flying market leaders will be susceptible to a pullback at the same time.

This phenomenon is variously referred to as “concentration,” a lack of “breadth,” or low “participation” among most index-fund stocks. These are the key words to look for when you’re researching the state of the stock market in 2025.

Notably, this isn’t a problem with small-cap stocks. In the Russell 2000, there are thousands of small-cap stocks and none of them dominate the index.

Courtesy: @ISABELNET_SA

You might assume that the S&P 500 can’t be dominated by a small handful of stocks because it has so many constituents. Yet, if only 10 companies collectively comprise 40% of the S&P 500’s market cap, you can definitely end up with a lopsided market.

The upshot is that legions of index fund investors don’t even realize that their portfolios are poorly diversified. A quick spike in tech-sector volatility could derail their retirement plans for months or years.

If you’re wondering which stocks are almost single-handedly holding up the market in 2025, look to the usual suspects: Apple, Microsoft, NVIDIA, Amazon, Meta Platforms, and so on. Tesla and Alphabet are also in the mix, but they’ve lost some of their influence since they were dubbed “Mag 7” members a few years ago.

Some commentators might add Palantir Technologies to the list, especially now that Palantir stock is in the midst of a moon-shot. If that’s the case, then Palantir will be yet another technology firm with outsized influence over the stock market.

Courtesy: @dailychartbook

Even among these few Big Tech leaders, some are zooming far ahead of the others. For example, NVIDIA and Microsoft have briskly outpaced Apple in the months following the April stock-market bottom.

So, in 2025 the “Mag 7” might have to be whittled down to just three or four tech stocks. This doesn’t necessarily mean that a stock market crash is imminent, but a rotation into less frothy names could be right around the corner.

It shouldn’t be too surprising if largely overlooked market segments finally start to play catch-up in Q3 and Q4. Again, I would emphasize small-cap stocks as potential runners during a rotation away from Big Tech.

In any case, these considerations should prompt prudent investors to diversify if they’re overly reliant on index funds tracking the NASDAQ and S&P 500. Otherwise, an outflow from a small number of tech leaders could put complacent indexers in a dire position.