New research suggests that the rise of passive investing may have created a self-reinforcing feedback loop—one that fuels rising stock prices and market concentration. In our view, this concentration is driven not only by the momentum of passive inflows but also by the extraordinary earnings power of a few dominant companies and structural changes in the public markets. For investors, understanding these dynamics is essential when seeking true diversification beyond the traditional stock market.

The Potential Feedback Look

Passive investing has transformed how investors access the stock market. Rather than trying to outperform an index, passive strategies aim to replicate its performance, such as the S&P 500. Most of these indices are weighted by stocks’ market capitalizations, a company’s stock price multiplied by the number of shares outstanding. This means the largest companies have the most significant influence on returns.

Because passive funds are typically low-cost, they’ve attracted enormous inflows over the last decade. As money flows into these strategies, they automatically buy more of the largest companies in the index.

This contributes to those companies’ share prices rising even more, prompting more buying by active investors who track price momentum (the relative outperformance of a stock or group of stocks). This can create a feedback loop that reinforces momentum and pushes the market toward greater concentration in a handful of large stocks.

The Outperformance of Big Tech

At the same time, large U.S. technology companies have significantly outperformed the broader market. Their superior earnings growth and dominant competitive positions have justified at least some of that performance. For example, in the chart below, we show that earnings growth in the technology sector has far outpaced other sectors over the past five years.

Earnings Growth in the Technology Sector vs. Other Sectors (Past 5 Years)

Source: FactSet

Their strong fundamentals, in combination with strong passive inflows, have contributed to an outsized share of the overall market. Today, a small number of firms, often referred to as the “Magnificent 7,” account for more than one-third of the S&P 500’s total value.

The Changing Market Structure

One lesser discussed contributor to the market concentration trend is a significant shift in the U.S. market structure. In 1995, there were about 8,000 publicly traded companies in the U.S. Today, there are fewer than 4,000. Most of those missing names did not go bankrupt. They went private. As the cost of being a publicly held company increased over the years, many companies were acquired or “taken private” by private investors seeking to manage companies outside of the quarterly pressures of public markets. 

Many of these acquisitions were in traditional industries such as industrials, consumer goods, and retail. The resulting public equity market is heavily weighted toward large technology firms. Investors looking to rebalance toward a more diversified representation of the economy and who can tolerate some illiquidity may want to consider adding private markets to their public markets portfolios. Private markets can provide valuable sector diversification, offering exposure to sectors and growth opportunities that are no longer well represented in public markets.

Rethinking Diversification in a Concentrated Market

The rise of passive investing has done more than lower costs. It has subtly reshaped the character of the markets. By design, market-cap-weighted indexes buy more of the companies that have already gone up, reinforcing momentum and concentrating returns in the largest names. Combined with the strong earnings power of big U.S. technology firms and the shrinking universe of publicly listed companies, that feedback loop has made the market even narrower.

Investors seeking true diversification may want to look beyond traditional public markets. Private market opportunities can offer valuable exposure to sectors that no longer exist or are underrepresented on major stock exchanges. Understanding these structural forces helps ensure portfolios reflect the broader economy, not just a handful of mega-cap tech names.

Have questions about diversification, market concentration, or how passive investing fits into your strategy? Contact Us today. We're here to help.

Michael Embrescia is a financial advisor located at EmVision Capital Advisors, 251 W. Garfield Rd. ​Suite 155 Aurora, OH 44202. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at (330) 954-3770 or at info@emvisioncapital.com.

1Brightman, Chris and Harvey, Campbell R., Passive Aggressive: The Risks of Passive Investing Dominance (July 08, 2025). Available at SSRN: https://ssrn.com/abstract=5259427 or http://dx.doi.org/10.2139/ssrn.5259427

Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Additional advisory services offered through EmVision Capital Advisors, LLC are separate and unrelated to Commonwealth. Fixed insurance products and services are separate from and not offered through Commonwealth Financial Network. Registration as an Investment Adviser does not imply any level of skill or training. 

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This is for informational purposes only, is not a solicitation, and should not be considered investment, legal or tax advice. The information in this report has been drawn from sources believed to be reliable, but its accuracy is not guaranteed and is subject to change. Investors seeking more information should contact their financial advisor. Financial advisors may seek more information by contacting AssetMark at 800-664-5345.

Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss. Actual client results will vary based on investment selection, timing, market conditions, and tax situation. It is not possible to invest directly in an index. Indexes are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested in directly. Index performance assumes the reinvestment of dividends.

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8520420.1| 10/2025 | EXP 10/31/2027