With nearly 40% of the S&P 500 concentrated in just 10 stocks and market breadth deteriorating, diversification and active portfolio decisions are becoming increasingly important.

A few weeks ago, I wrote about five things I would be watching as we headed into the final three months of 2026.

One of those was whether the broadening of the equity market was real.

After years of market performance being driven by a relatively small number of mega-cap technology companies, we had started to see signs of broader participation. Value stocks were outperforming growth, smaller companies were showing signs of life, and market leadership appeared to be expanding.

That was encouraging.

After all, a healthy bull market should ideally be supported by more than a handful of companies.

But recently, I’ve started questioning just how healthy this market really is.

The S&P 500 continues to present a relatively calm picture. Yet when you look beneath the surface, the story becomes considerably more complicated.

A large percentage of S&P 500 companies are trading below their 50-day moving averages. Small-cap stocks have struggled over the past three months. And according to the recent performance figures I’m tracking, only four of the 11 S&P 500 sectors have generated positive returns over that period.

Meanwhile, the 10 largest holdings account for nearly 40% of the S&P 500.

The market may look healthy at the index level, but that doesn’t mean the average stock is doing particularly well.

And I think that distinction matters more than many investors realize.

1. The S&P 500 Isn’t the Entire Stock Market

One of the most common mistakes investors make is treating the S&P 500 as a complete representation of the U.S. equity market. It’s certainly an important benchmark. But the S&P 500 is a market-capitalization-weighted index.

That means the largest companies have the greatest influence on performance.

When a handful of mega-cap companies perform well, they can push the index higher even when a significant number of other companies are declining. Think about that for a moment.

You can have an S&P 500 that appears resilient while hundreds of its individual constituents are struggling to maintain their recent price trends. That’s why I pay attention to market breadth.

One measure I find particularly useful is the percentage of stocks trading above their 50-day moving averages. When that percentage is high and improving, it suggests that market strength is being supported by a broad group of companies. When it deteriorates, it suggests that fewer stocks are participating.

Neither reading guarantees what happens next. But it helps answer an important question:

Is the market getting stronger, or are the largest companies simply doing a better job of hiding the weakness?

Right now, I’m increasingly concerned that we’re seeing more of the latter.

2. Nearly 40% of the S&P 500 Is Concentrated in Just 10 Companies

Perhaps the most striking example of how narrow the market has become is the concentration of the S&P 500 itself. The 10 largest holdings represent nearly 40% of the index. Let that sink in.

An investor who buys an S&P 500 index fund may believe they’re getting broad diversification across 500 leading U.S. companies. Technically, they are gaining exposure to hundreds of companies.

But from a portfolio-risk perspective, a relatively small number of stocks have an outsized influence on their investment outcomes. That’s an important distinction. And to be clear, this isn’t necessarily a criticism of those companies. Many of the largest companies in the index are exceptional businesses with strong balance sheets, durable competitive advantages and impressive earnings growth. Their success has helped drive market performance.

But a great company isn’t automatically a great investment at every valuation. And owning a great company doesn’t eliminate concentration risk.

In fact, the stronger a relatively small group of companies performs, the larger their weight becomes in a market-cap-weighted index. Success can actually create additional concentration.

There’s nothing inherently wrong with owning the market. But investors need to understand what owning the market means today.

Diversification isn’t just about how many stocks you own. It’s about how much risk is concentrated in the same companies, sectors and investment themes.

That’s a very different conversation than simply telling a client they’re diversified because they own an S&P 500 index fund.

3. What Happened to the Broadening Rally?

Earlier this year, one of the more encouraging developments was the apparent broadening of equity market leadership.

Value stocks were outperforming growth. Smaller companies were showing improving participation. And investors were beginning to find opportunities outside the usual mega-cap winners.

I viewed that as a positive development. A market supported by multiple sectors, styles and company sizes is generally more encouraging than one dependent on a narrow group of stocks. But the past three months have challenged that narrative.

The Russell 2000 has declined considerably, while performance across S&P 500 sectors has become increasingly uneven.

Only four of the 11 sectors have delivered positive returns over the recent three-month period.

That tells me the broadening rally is facing a meaningful test. And the weakness in small caps is particularly interesting.

Smaller companies tend to be more sensitive to financing costs, domestic economic conditions and changes in credit availability. With Treasury yields elevated and the Federal Reserve potentially not finished raising rates, smaller businesses may face a more challenging operating environment than their mega-cap counterparts.

Many of the largest companies have substantial cash balances, strong margins and easier access to capital. Smaller companies often don’t enjoy those same advantages.

That doesn’t mean small caps are destined to underperform. But it does suggest investors should be cautious about assuming that a broadening rally will automatically continue simply because it began earlier in the year.

Market leadership can broaden. But it can also narrow again.

And right now, the evidence suggests investors should be watching the latter possibility closely.

4. Calm at the Index Level Doesn’t Mean Calm Beneath the Surface

I recently had a fascinating conversation with Paisley Nardini, Head of Investment Strategy at Tema ETFs, on the Views From 6,230 podcast.

One of the themes of our conversation was how calm the market can appear on the surface even when there’s considerable turbulence underneath. I think that’s an especially important point in today’s environment.

Investors often look at the S&P 500 or the VIX and conclude that market conditions are relatively stable. But individual stocks can experience significant price swings without producing equally dramatic movements in the overall index.

Why?

Because stocks don’t always move together. Some companies may be rising sharply while others are falling just as dramatically. When those movements offset one another, index-level volatility can remain relatively subdued.

But that doesn’t mean the risks have disappeared. It means the index isn’t necessarily capturing the full experience of the individual companies within it.

This is where dispersion becomes important.

When the performance gap between individual stocks widens, the difference between owning the right companies and the wrong companies becomes increasingly meaningful.

And that brings me to what I believe is one of the more important investment implications of today’s market.

5. This Is Where Active Management Can Add Value

I’ve never believed the investment debate should be framed simply as active versus passive. Both approaches have a place in a well-constructed portfolio.

Low-cost index funds have provided investors with efficient, transparent access to markets. That hasn’t changed. But I do believe today’s environment strengthens the argument for a more active approach to portfolio construction.

Here’s why.

When the largest 10 companies represent nearly 40% of an index, passive investors are accepting a significant amount of concentration simply by owning the benchmark.

They’re not making an explicit decision that those companies deserve such large allocations based on valuations, fundamentals or risk. They’re accepting the weights determined by market capitalization.

An active manager, by contrast, has the ability to make deliberate decisions about position sizing, valuations, sector exposures and portfolio risk. They can choose to own less of an expensive mega-cap company. They can look for opportunities among overlooked businesses whose fundamentals may be stronger than their recent stock performance suggests. They can manage exposure to crowded investment themes. And they can potentially take advantage of the widening dispersion between winners and losers.

Of course, that doesn’t mean active management automatically outperforms.

It doesn’t.

Active managers can make poor decisions, take excessive risks, charge too much or simply get their investment calls wrong. But when market leadership is narrow and dispersion is elevated, I believe the opportunity for skilled active managers to distinguish themselves becomes more interesting.

The key word is skilled. This is also why manager due diligence matters.

Investors need to understand what an active manager actually does, how the portfolio differs from the benchmark, whether the process is repeatable and whether the risks are appropriate for the client’s objectives. Simply paying a higher fee for something labeled active isn’t a strategy.

Active management should be about making intentional investment decisions—not simply being different from an index.

And importantly, an active approach doesn’t always require hiring an active mutual fund or SMA manager. It can also mean taking a more deliberate approach to asset allocation, rebalancing, factor exposures and portfolio construction using ETFs.

The point is to understand the risks you’re taking rather than accepting them by default.

6. Diversification Matters More Than Ever

If there’s one portfolio-construction lesson I’d emphasize from the recent deterioration in market breadth, it’s the importance of diversification.

Not diversification for the sake of owning more investments. Meaningful diversification.

That starts with understanding where a portfolio’s risks actually come from.

An investor could own several different U.S. equity ETFs and still have significant exposure to the same handful of mega-cap companies. They might own an S&P 500 index fund, a large-cap growth fund, a technology ETF and an AI-themed ETF.

On paper, that looks like four different investments. In reality, the overlap could be substantial. And when the same companies dominate multiple holdings, investors may be taking considerably more concentrated risk than they realize.

That’s why I think investors and financial advisors should revisit a few important questions:

·       How much of the portfolio’s total equity exposure is concentrated in the largest U.S. companies?

·       Are different funds and strategies providing genuine diversification, or simply duplicating exposures?

·       Is the portfolio overly dependent on a particular sector, investment style or theme?

·       Are there opportunities to broaden exposure across company sizes, sectors, investment factors and international markets?

·       Could active managers or more deliberate ETF allocations help improve the portfolio’s overall risk profile?

None of this means abandoning large-cap U.S. equities. And it certainly doesn’t mean selling successful companies simply because they’ve performed well. But it does mean recognizing that yesterday’s winners can become an increasingly large share of tomorrow’s portfolio risk.

Sometimes the most important portfolio decision isn’t identifying the next great investment. It’s recognizing when an existing investment has become too important to the portfolio’s success.

The View From 6,230

A few weeks ago, I asked whether the broadening equity market was real. Today, I’m not as convinced.

The S&P 500 may still appear relatively healthy, but beneath the surface we’re seeing signs of weakening participation, struggling small caps and increasingly narrow sector leadership.

And with nearly 40% of the index concentrated in just 10 companies, the performance of a relatively small group of stocks has become disproportionately important.

Does that mean a major market correction is imminent?

No.

Narrow markets can remain narrow for a long time. And strong earnings from market leaders can continue supporting index performance. But I don’t think investors should confuse index-level resilience with broad market strength.

More importantly, I don’t think they should confuse owning hundreds of stocks with having a genuinely diversified portfolio.

This is an environment where understanding portfolio exposures, being selective and making deliberate investment decisions could become increasingly important.

It’s also an environment where skilled active management may have opportunities to add value, not because passive investing has stopped working, but because the risks embedded in capitalization-weighted indexes deserve more attention.

I’m not suggesting investors abandon the S&P 500. I’m suggesting they look beyond it. Because sometimes the most important market signals aren’t coming from the index everyone is watching.

They’re coming from the stocks the index is hiding.

Be sure to like and subscribe to the Views from 6,230 YouTube Channel.

This week on Views from 6,230: The Market Looks Calm. Look Beneath the Surface.

I had the pleasure of speaking with Paisley Nardini, CFA, CAIA, Head of Investment Strategy at Tema ETFs, to discuss how calm index-level markets are masking narrow leadership, rising dispersion, shifting rate expectations, and concentration risk in both equity and bond indexes. We also cover 2026’s “whiplash” move from expected rate cuts to hikes, subdued VIX versus spiking bond volatility, resilient earnings, and why investors often overemphasize midterms despite historically positive fourth-quarter seasonality.

The Week Ahead

Be on the lookout for our next episode of Views from 6,230, where I sat down with Michael Monaghan, Partner and Portfolio Manager at Founder ETFs on the importance of financial advisor – asset management firm partnerships. And how advisors can use these relationships to deepen client engagement, convert new opportunities, and grow without losing sight of their responsibility to the end investor.