The Narrowing Market: A Note on Concentration

August 19, 2026 – The first half of 2026 rewarded investors who stayed the course through an unusually noisy backdrop. We navigated a war involving Iran and the oil spike that came with it, a tariff regime that was imposed, challenged in the courts, and partly refunded, a labor market that has quietly softened, and a Federal Reserve that has held rates steady while the market debated whether the next move might actually be a hike. Against all of that, risk assets delivered another strong six months. It is a useful reminder that standing still while remaining paralyzed by the headlines is rarely the right response.

But strong headline returns can obscure as much as they reveal, and this quarter we want to spend our time on something that sits just beneath the surface: the degree of concentration in U.S. equity markets has reached a level that deserves our deliberate attention.

This has been a market driven by earnings, not by a booming economy. The economy itself remains, in the words of one strategist we follow, something closer to a tortoise, growing near 2%, with a genuine demographic drag as immigration slows and the working-age population barely expands. What has powered equities is a secular theme rather than a cyclical one: artificial intelligence, and more specifically the extraordinary wave of capital spending being poured into it.

When discussing market concentration, the single statistic worth considering is this: the ten largest companies in the S&P 500 now account for nearly 40% of the entire index’s value. A handful of technology and technology-adjacent businesses (roughly nine names) make up about 35% of the U.S. market on their own. Rarely in history has so much of a broad index rested on so few shoulders.

Valuation compounds the point. The S&P 500 trades at about 20.4 times forward earnings, well above its 30-year average of 17.2 times. On a cyclically adjusted basis the picture is more stretched still, near 40 times versus a long-run average closer to 29. Elevated valuations do not tell you when a market will turn, but they do tell you something about the margin of safety. When you pay a full price for a narrow group of stocks, the market becomes more sensitive to any disappointment: on earnings, on rates, or simply on sentiment.

Here is the subtler risk, and the reason concentration is worth a full letter. Many investors reach for emerging markets or a broad global allocation believing they are diversifying away from the U.S. technology trade. Increasingly, they are not. Emerging market performance this year has been driven by the same force  – Artificial Intelligence – expressed through the semiconductor and memory manufacturers of Korea and Taiwan. Three semiconductor companies alone represent more than a third of the MSCI Emerging Markets Index. Emerging markets, in effect, have become another side of the same coin.

When these related bets move together, they can move violently. In June we saw one-day declines of roughly 10% in Korean equities and 8% in U.S. semiconductors on nothing more than a shift in tone about the pace of AI spending. Record amounts of money now sit in concentrated, leveraged, thematic funds that amplify exactly these swings. A portfolio that looks diversified on paper may in practice be a single, highly-levered wager on one story.

Concentration is not only a feature of the index; it accumulates quietly inside portfolios too. Consider an investor who set a disciplined 60/40 stock-and-bond mix a few years ago and simply let it run. After a stretch of powerful U.S. technology gains, that allocation has drifted toward something like 75 to 80% equities. No one made a decision to take on that much additional risk: it crept in through appreciation. The exposure grows a little each day until, one day, it is far larger than intended.

What we are doing about it

None of this is an argument to abandon U.S. equities or to fight the AI theme. The earnings behind it are real, and the technology is genuinely transformational. It is an argument for discipline. In practical terms, that means a few things. We are rebalancing: trimming the winners that have grown beyond their targets and restoring intended weights, the least glamorous and most valuable habit in investing. We are leaning into international value, particularly in Europe and Japan, where financials, industrials, and consumer names – supported by real corporate-governance reform – have kept pace with U.S. growth without requiring us to pay the same rich prices. We are broadening equity exposure through small- and mid-cap names that have led this year yet remain under-owned.

We are also restoring the role of core fixed income as a genuine shock absorber. History is instructive here: recovering from a 20% equity decline has taken an all-stock portfolio roughly two years, while a 60/40 portfolio has historically recovered in about half that time. With the aggregate bond index yielding close to 4.7%, bonds today offer both a reasonable return and real ballast. Finally, we continue to use alternatives and low correlation growth strategies for diversification and defense, alongside more selective, offensive exposures.

Markets are neither the best of times nor the worst of times. They are, however, unusually dependent on a small number of stocks telling a single story. Our job is to make sure your portfolio is not quietly making that same concentrated bet without your consent: to keep valuation in view, to diversify deliberately rather than by accident, and to hold the discipline to trim when everything feels easiest.