The Fallacy of Market Concentration
What historical data suggests about concentration and risk in the market
A common concern among investors today is that the U.S. stock market depends too heavily on a small group of very large companies. It feels intuitive that if a handful of firms carry more of the market’s weight, then any setback in those firms could create sharper swings for everyone. A recent research paper by Mark Kritzman of MIT and David Turkington of State Street tests that belief using extensive historical data. Their findings show that the market is more concentrated than it has been in recent decades, but this shift has not made the market more fragile.
Understanding the rise in concentration
The growth of technology and artificial intelligence leaders has increased their share of the U.S. market. Fewer companies now represent a larger portion of total market value. This development is real, and it reflects the scale and reach of the largest firms. The natural reaction for many investors is to assume that this creates more instability. If the market leans more heavily on fewer companies, the concern is that volatility will rise whenever one of those companies faces bad news. The research addresses this concern directly. The authors examine nearly one hundred years of market data to see whether periods of higher concentration led to higher volatility or deeper drawdowns. They find no meaningful evidence that they did. Concentration can feel alarming, but feeling and reality are not the same.
What the evidence shows about risk
One of the clearest tests in the study compares two simple approaches. The first holds the broad market without adjusting exposure. The second reduces stock exposure whenever concentration increases and adds exposure when concentration decreases. If higher concentration made the market more fragile, the second approach should reduce risk or improve returns. Instead, it produces lower returns and higher volatility than simply holding the market. Responding to concentration would have harmed investors over time. The authors also study whether concentration predicts future performance across major sectors. If concentration created vulnerability, sectors with more concentrated leadership should show more volatility or larger losses in the following year. The data shows no consistent link. Concentration did not explain future results in a meaningful way.
A major reason is that the largest companies tend to have more stable characteristics than smaller companies. They operate across more products, more customers, and more regions. They have better access to capital, more experienced leadership teams, and more flexibility to manage changing conditions. When the researchers sort companies by size, the largest groups consistently show lower volatility and fewer extreme outcomes than the smallest groups. This pattern holds across the shorter and longer historical samples they analyze.
What this means for long-term investors
The rise in market concentration has led many investors to question whether the market is riskier today. The research indicates that this fear is not supported by the evidence. A market led by a small number of very large companies has not been more volatile or more fragile. These companies are diversified global businesses that behave differently from small, single-line firms. Concentration in company weights does not equal concentration in economic exposure. For long-term investors, the key message is that concentration alone is not a reason to adjust portfolios or reduce equity exposure. Staying invested and focusing on long-horizon planning has been the more reliable approach across market cycles.
All findings in this summary are based on the research paper The Fallacy of Concentration by Mark Kritzman and David Turkington.