The S&P 500 Index is generally thought of as broadly representative of the stock market—in fact, to many people the index is the stock market, given that it's comprised of about 500 large-cap stocks. But it has lately come to be dominated by its largest companies, most of them in the technology sector, to a degree not seen in decades. In facဣt, the 10 largest stocks accounted for more than a third of the index's market capitalization for much of 2024.

This concentration has been great for investors so far, with the index rising more than 20% annually for two consecutive years. But consider that the so-called Magnificent 7 stocks—Alphabet (GOOG), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA)—accounted for more than half of the index's 25% gain in 2024. This imbalance could present 🐻a risk if the market reverses course and experiences a severe sell-off.🍒

Few would escape the pain, given that the index is a common vehicle for investors to gain broad exposure to U.S. stocks, including through 401(k) retirement accounts.

The Market Cap-Weighted S&P 500 Index

The S&P 500 Index is structured so that companies with larger market capitalizations carry greater weight in its performance. Market cap is calculated as the company's share price multiplied by the total number of shares outstanding. The index's weighting is adjusted as share prices and the number of outstanding shares change, 澳洲幸运5官方开⭕奖结果体彩网𒉰:ensuring it reflects current conditions.

The S&P 500 is also float-adjusted, which means only shares available to the public are used to calculate its weighting. Frequently used as a benchmark by 澳洲幸运5官方开奖结果体彩网:mutual funds and ETFs, it is widely recognized for its broad market coverage and reliable weighting methodology, and is considered a barometer of broader U.S. economic health.

What This Means for the S&P 500

The market-cap weighting gives dominant firms like the Magnificent 7 enormous influence over the index's overall returns. And when the share prices of th🦩ese and other tech companies rise, their𒀰 weighting on the index increases, further reinforcing their influence, including during any selloff.

Performance of the S&P 500 Index in 2024

Investors in U.S. stocks enjoyed another great year in 2024, with the S&P 500 rising 25%. But the details behind the impressive gains reveal how much influence a small minority of stocks can have over capitalization-weighted indexes. The Magnificent 7 accounted for 53% of the S&P 500's total gain in 2024—without those seven stocks, the index would have risen only 11.75%.

The table below illustrates ꦗthe performance of each member of the Magnificent 7 in 2024.

What Underperforming Tech Stocks Would Mean

Due to their huge weighting, the same standout gainers such as Nvidia (NVDA), Apple, and Amazon would weigh down the S&P 500 if they began underperforming or if broader tech stocks suffered a harsh selloff. The pain would spread to just about everybody with ♔a 401(k), though sectors such as consumer discretionary, communication services, and financials would likely help cushion the blow.

Of course, if the tech stocks did underperform other sectors, market caps would change and the index would be rebalanced, diminishing the weighting of tech companies and their influence on the index's performance. But that might be cold comfort for any investors who lost money, even if only on paper, in the process.

The Bottom Line

The S&P 500's market-cap weighting and the recent outsized influence of tech companies have been great for investors over the past couple of years, pushing the index to big gains. However, the heavy weighting of a relatively small group of stocks also poses a potential risk—they would exert an oversized influence in pulling the index down during a selloff.

This does not mean the market is due for a selloff. In fact, Goldman Sachs points out that the S&P 500 has rallied more often than it has declined after periods of peak concentration.