Understanding benchmark risks in a concentrated market

Recent market performance has presented a stark contrast. The S&P 500 gained 2.3% in the third quarter of 2026, while the equal-weighted S&P 500 declined 1.9%, representing a 4.2-percentage-point gap. The S&P 500 gives larger companies more weight in its index portfolio, while its equal-weighted counterpart periodically resets each company to an equal weight.

This example shows how allocating differently to the same set of companies can change the investment experience. And while we’re only comparing two indices, we can apply the lesson to decisions about how closely investor portfolios should mirror market benchmarks.

A strong index can hide a divided market

U.S. equity market performance has grown narrower in recent years. Roughly 30% of S&P 500 companies outperformed the index over the trailing three years through September 2026, near the low end of the range going back to 1991.

Exhibit 1: Share of S&P 500 companies outperforming the index

Three-year trailing basis

As of September 30, 2026. Source: Bloomberg, JPMorgan Asset Management

At the same time, the top ten stocks in the S&P 500 accounted for 54% of its 2026 year-to-date returns, though their contribution peaked at 78% at the end of June.¹ That compares with a long-term average contribution of approximately 45% over the last three decades, suggesting concentration remains above historical norms.

This increasingly narrow performance has coincided with climbing index concentration. The ten largest constituents in the S&P 500 now represent 41% of the index weight and contribute 36% of its earnings, representing historical extremes over the last 30 years. Their earnings contribution helps explain their prominence, but investors tracking the index nevertheless rely heavily on a small group of companies.

Exhibit 2: High concentration in the S&P 500’s top 10 names

As of September 30, 2026. Source: FactSet and Goldman Sachs

The concentrated nature of the earnings picture is due to an increasing divide: companies outside of the AI infrastructure theme, which includes most of the market, have generally produced healthy high-single to low-double-digit earnings growth in recent quarters. Still, they’ve lost ground to the much greater earnings growth generated by companies involved in the AI buildout.

Exhibit 3: Differences in earnings growth rates by proximity to the AI buildout

The AI infrastructure basket tracks companies that Goldman Sachs determines are positioned to benefit from the buildout of AI-related infrastructure, including semiconductor companies, cloud providers, hardware and networking suppliers, data center real estate companies, utilities, and cybersecurity providers. As of September 30, 2026. Source: FactSet and Goldman Sachs

The large technology companies leading the AI buildout are sprawling global platforms that are shielded from competition to varying degrees, and their core businesses generate huge free cash flows that they’ve used to fuel their AI infrastructure investments.

But these strong businesses do not eliminate the downside risk of a market increasingly dependent on the same investment theme. If confidence in the AI spending cycle weakens, leading companies could come under pressure in sympathy with weaker companies that are not as well financed. The outsized index weights of leading companies could translate that reversal into a significant index decline, as selling pressure forces a revaluation of the leaders.

Do market indices still represent the whole market?

The rationale for tracking a broad index is that it is supposed to be representative of the market. Index concentration may call that rationale into question.

As its name implies, the S&P 500 is supposed to serve as an index of 500 constituent stocks. But it has been increasingly behaving like a much more concentrated portfolio. The Effective N metric enables investors to calculate the number of equal-weighted portfolio holdings needed to achieve the same level of diversification as a concentrated portfolio. As Exhibit 4 shows, that number for the S&P 500 was less than 45 holdings as of October 23, 2026—which was more than 50% below its longer-term average.

Exhibit 4: The S&P 500 has been behaving like a much smaller portfolio

As of October 23, 2026. Source: Bloomberg

Matching the market comes with trade-offs

Investors must balance two risks:

• Aligning with market benchmarks and accepting their concentration risk, including greater exposure to a reversal in the dominant investment theme
• Reducing those exposures and accepting potentially different results

We believe the continuing trend of strong double-digit earnings growth supports the case for continuing to pursue equity exposure, but it does not mitigate the concentration risk in market benchmarks today. Beyond the stock market, the hyperscalers also comprise an increasing share of bond market benchmarks. The ever-growing price tag of the AI buildout has begun to exceed their ability to generate cash, so they’re increasing their reliance on debt financing, raising the prospect of cross-market concentration risk.

There are also growing indications of vulnerability in markets. The recent run-up in interest rates displayed the varying degrees of sensitivity within the AI theme, as the largest hyperscalers led while semiconductors lagged after surging earlier in 2026.

At the same time, investors have borrowed at historic levels, which increases the risk of more volatile selloffs if or when they materialize. Margin debt-to-GDP stood at 4.5% in August 2026, surpassing the prior peak of 3.0% in March 2000.²

We believe prudent investors should neither pursue index alignment at any cost nor seek index differentiation for its own sake. Both raise the risk of being beholden to a portfolio that’s not built to achieve their investment objectives. Instead, investors should be guided by the question of whether portfolio exposures improve return potential and diversification in keeping with their investment plan.

The answer to that question can change over time, and the freedom and judgment to determine when accumulated risks within the market require portfolio changes represent key potential investor advantages.