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The scale of this shift is remarkable, and it is not limited to U.S. indices. At the end of 2025, Germany, France and China, to name a few, saw their top 10 names account for 62%, 57% and 47%, respectively. We believe this underscores that rising concentration is a global trend, not just a U.S. dynamic. Much of this growth has been driven by technological leadership and the race to dominate AI. While these companies are exceptional businesses, their size now means market outcomes are increasingly shaped by a narrow set of assumptions — about technology adoption, regulation, capital costs and long-term growth that may or may not ultimately prove correct.

One reason market leadership has become so concentrated lies in how stock market indices are constructed. In indices that weight companies by size, rising stock prices automatically lead to larger positions. As a result, when money flows into index funds, a growing share of each new dollar must go into the largest companies simply to keep their weights in line. This makes market and investor liquidity a key variable in the overall risk/return profile of investing in an index. Simply maintaining those large weights requires substantial and ongoing buying, soaking up all marginal liquidity and pushing prices higher even without new information about the businesses themselves. Smaller companies, by contrast, lose out on the marginal capital and face downward pressure. Over time, this creates a self-reinforcing cycle in which success attracts more money, and more money helps sustain higher prices. The same mechanism works in reverse: When investors pull money from index funds, the largest stocks must be sold, often at moments when market liquidity is strained.

The downside of this structure is not theoretical. In 2022, as technology stocks corrected, the seven largest companies in the S&P 500 declined by more than 40% — roughly twice the decline of the broader index. Investors who believed they owned a broadly diversified portfolio experienced a drawdown driven largely by exposure to a narrow group of stocks. This episode served as a reminder that market-cap weighting can magnify both gains and losses, particularly when leadership becomes crowded.

For investors, this raises an important question: Do they fully understand the risks embedded in what is often perceived as a “neutral” investment? A market cap-weighted index may still hold hundreds of companies, but its behavior is now driven by a small handful of stocks. Diversification, in this context, can be more theoretical than real.

Periods when these companies perform well can mask this risk; periods when they don’t can expose it very quickly.

There are also broader implications for market stability. Extreme concentration can reduce effective price discovery, amplify volatility and increase the market’s sensitivity to non-fundamental events. Regulatory action, geopolitical tension or shifts in government policy — particularly around technology, data or AI — could have outsized consequences given how much of the market’s value is tied to a few companies. These risks are difficult to model precisely, but they are increasingly difficult to ignore.

Against this backdrop, our responsibility as investors is clear. While we invest in many of these companies, our portfolios are not constructed to replicate index weights. Exposure is determined by our assessment of each company’s fundamentals, valuation, competitive position and contribution to overall portfolio risk. We consistently ask questions such as: What is the upside from here, relative to the downside? How resilient is this business across different economic environments? And how does a large position align with our clients’ long-term objectives?

These questions can be uncomfortable during periods of strong market performance, particularly when momentum appears self-sustaining. But we believe that risk is not eliminated by popularity, and concentration is not the same as conviction. Thoughtful portfolio construction requires distinguishing between owning great businesses and over-owning them simply because the market does.

In an environment increasingly shaped by passive flows and concentration, we believe active judgment, diversification and risk awareness matter more than ever. Our goal remains unchanged: to help clients participate in long-term growth while continuing to be disciplined about the risks they are taking — both the obvious ones and the structural ones that are easier to overlook.