In 2025, the U.S. equity market is once again showing signs of imbalance. While the S&P 500 continues to post gains, the rally is being powered by a familiar engine; a handful of mega-cap tech names. Beneath the surface, however, lies a vulnerability that investors shouldn’t ignore—concentration risk.

The S&P 500’s increasing concentration is evident in the rising weight of its top ten holdings, which has doubled over the past decade. A small group of companies is driving the bulk of the index’s returns, masking the performance of the broader market and exposing investors to greater downside risk. For long-term investors, maintaining diversification and discipline is now more critical than ever.

Today’s capital market and economic environment

According to a Reuters report, as of June 2025, more than half of the S&P 500’s year-to-date gains came from just seven companies: Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta, and Broadcom¹. Their exceptional performance is undeniable, but their dominance raises questions about the durability of the broader market rally.

This concentration risk is unfolding against a backdrop of heightened macroeconomic uncertainty. The U.S.–China tariff truce has temporarily stabilized market sentiment, but the global trade architecture remains fragile. Ongoing uncertainty over U.S. tariff policy continues to cloud the outlook for global growth and inflation.

The U.S. fiscal position is deteriorating. Moody’s recently downgraded the sovereign credit rating, citing unsustainable debt dynamics². The “One Big Beautiful Bill Act” has added trillions to the deficit, pushing the debt-to-GDP ratio toward 100%. The Congressional Budget Office (CBO) estimates it could exceed 120% within a decade³, raising serious questions about long-term debt sustainability.

Geopolitical risks are also intensifying. On June 22, the U.S. launched Operation Midnight Hammer, targeting three Iranian nuclear facilities. Although the immediate market response was muted, the strategic risks are real. With 40,000 U.S. troops now on high alert in the region, the potential for escalation and its impact on energy markets and investor sentiment can’t be dismissed.

The math of losses and sequence risk

Why does this matter? Concentration amplifies downside risk. A portfolio that loses 20% must gain 25% just to break even. A 30% loss requires a 43% rebound. The deeper the drawdown, the harder the recovery.

This is why protecting against large losses is so important. Limiting downside, especially at key inflection points like the beginning of retirement or the start of a new investment, can significantly improve long-term outcomes, even if it means sacrificing some upside.

Sequence risk compounds the problem. If poor returns occur early in retirement while withdrawals are being made, the damage to portfolio longevity can be severe. Losses are locked in, and with less capital left to recover during a rebound, the odds of portfolio depletion increase significantly.

Lessons from the past

History offers clear warnings about the dangers of overconcentration. In the early 1970s, the Nifty Fifty, a group of blue-chip stocks once considered bulletproof, led the market at extreme valuations. Many of them collapsed in the subsequent downturn and never recovered.

The dot-com bubble was another example. A narrow rally led by tech stocks ended in a sharp collapse, with the NASDAQ falling nearly 80% from its peak.

Strategies to reduce concentration risk

Diversification remains the most effective way to guard against concentration. Exposure to international equities, small caps, value stocks and alternative assets can reduce the reliance on any single sector or region. In an era of fragmented trade and shifting geopolitical alignments, regional diversification is no longer optional, it’s considered essential.

While markets are forward-looking, they’re not infallible. The current rally may persist, but it could also unravel if earnings disappoint, tariffs snap back or fiscal risks escalate. 

Investors should consider multi-asset strategies that blend equities, fixed income and alternatives while incorporating downside protection tools such as protective puts or collars. Tactical flexibility, when used judiciously, can enhance resilience.

Strategic patience, not tactical exuberance, should guide portfolio construction. In a world of fragile truces, growing fiscal imbalances and renewed geopolitical tensions, resilience should be more critical than ever.

The views expressed in this commentary are those of Canada Life Investment Management Ltd. as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Prospective investors should review the offering documents relating to any investment carefully before making an investment decision and should ask their advisor for advice based on their specific circumstances.

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