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Trend line break! The Mag 7 ETF (MAGS) versus the Ex-Mag 7 ETF (XMAG) which owns the rest of the S&P 500 without the 7, something big just happened. The ratio chart just broke down convincingly from an uptrend which has persisted for most of the year.

It could be a head fake or it could be a sign of things to come. Either way, it’s a good time to talk about one of the worst arguments about the stock market I’ve ever heard.

Of all the reasons not to remain invested in stocks over the last three years, the “it’s only seven stocks holding up the market” trope has been the dumbest one.

Valuation concerns, geopolitical issues, the national debt, tariffs and inflation - fine. Good enough reasons to maintain diversified portfolios and to avoid taking excessive risk. But the anti-passive crowd’s endless screeds about the dominance of the top technology names within the major indices (and related ETFs) has proved to be a) a false premise and b) as non sequitur a “bear case” as the hysteria over High Frequency Trading was a decade ago.

We’ll start with the false premise part. It’s just not true that only seven stocks are driving markets higher and that, should they stumble, we’d be in for a world of pain. They all stumbled this year. Meta is in a double-digit drawdown. Amazon too, with virtually no gain this year. Microsoft peaked in July. Nvidia is still consolidating after a blow-off top this fall. Apple spent the first half as an “AI Loser” whipping boy. Alphabet spent the spring playing the role of Patient Zero for LLM disruption. Tesla had a 50% crash from January to March. Even the almost-Mag 7 name Oracle has crashed horribly this year, it is now more than 40% off its highs and enjoying its worst peak-to-trough decline since the bursting of the dot com bubble a quarter of a century ago.

And despite all that mega-cap wreckage at various points during the year, the S&P 500 index’s 2025 price return is around 17% with just a couple weeks to go.

Here’s a percentage drawdown chart (YTD) with Microsoft, Oracle and Meta vs the S&P 500 ETF in green. If it’s true that the dollars coming into the SPY and IVV ETFs are the driving force dictating the composition of the stock market, why are some of the stock market’s biggest weightings falling while some of their peers (Apple and Alphabet) rise? Why is there so much dispersion between the mega-caps if they’re all supposedly so heavily influenced by blindly allocated inflows from the apathetic masses?

Maybe it’s just not true that this is what’s happening. Perhaps - and I know I’m going out on a limb here - the indexing “problem” is not actually stopping sentient humans and professional portfolio managers from exerting their active opinions on these companies’ stock prices with their deliberate, discerning buys and sells after all.

Meanwhile, two decidedly non-tech companies, Eli Lilly and Berkshire Hathaway, each joined the Trillion Dollar Market Cap Club in 2025. Neither of these companies has anything to do with the AI theme nor are they being thought of as beneficiaries of some sort of indexing bubble.

On Friday, 35 stocks in the S&P 500 made new 52-week highs. Only one of them was in the Technology sector (Analog Devices). The biggest names hitting new highs had absolutely nothing to do with the Mag 7 nor are they considered to be benefiting from index concentration, passive flows or any of the other allegedly problematic things people have been warning you about. Walmart - almost in the Trillion Dollar Market Cap Club - printed a new 52-week high. So did J&J. Most of the big banks - Bank of America, American Express, Wells Fargo, US Bancorp, PNC and Citi - made new 52-week highs too. Caterpillar, Chubb, Prologis, Parker-Hannifin, Newmont, GM, CSX, Dollar Tree, Ralph Lauren, Southwest Airlines, Delta, Textron, Steel Dynamics and Tapestry - new highs, new highs, new highs. These companies represent a plethora of different industries from every segment of the economy - planes, trains, automobiles, real estate, banks, retail, apparel, steel, insurance, credit cards, heavy machinery. It’s precisely what you’d want to see to tell you that concentration is not the story.

You can always tell the pundits who follow the S&P 500 index vs those who actually follow the stocks themselves by what they tend to fixate on. Anyone looking at the charts of individual names is not fixated on “it’s just seven stocks” because it’s not at all that. It’s the opposite.

If it pleases the court, a final exhibit - the S&P Equal Weight Index (top pane) breaking out to a new high along with the mega-cap dominated market cap-weight SPY (bottom pane) year to date:

Now we’ll address the point (b) - the idea that concentration at the top of the stock market is even a bad thing in and of itself. And I can do this with just a few statements, some of which you have heard me make before…

Every secular bull market in history has been accompanied by a popular wave of innovation, from canals in the early 1800’s to railroads in the late 1800’s, automobiles, radio and electricity in the 1920’s, television and the birth of the suburbs and the Interstate Highway System in the 1950’s, the Space Age of the 1960’s, the personal computer revolution of the 1980’s, the original dot com boom and cellular phones in the 1990’s, the social media and streaming era in the 2010’s, the cloud computing, data center and AI explosion of the 2020’s. It’s one wave after another and each time, there’s a group of stocks that best capture the enthusiasm of the investor class. These stocks become large relative to all others, produce outsized returns and come to dominate the indices for a time.

This concentration of big winners within a long bull market - be it with oil companies, telecom giants, semiconductor firms, PC makers or software titans - is not bearish or aberrant or in any way unnatural. Nor is it “caused” by passive index flows. Investors are buying shares in these companies at increasingly higher prices because they are the companies earning the most money in the global economy. There’s no conspiracy. What would actually be weird is if they weren’t dominating the indices, given the vast and enduring success of their businesses.

I’d also point out (again) that these aren’t actually “companies” in the traditional sense. They are horizontal conglomerates. Amazon has a cloud computing business, a grocery business, its own version of Netflix, an e-commerce operation, a shipping and logistics juggernaut and fifty other things going on inside it. And each of these businesses, on a standalone basis, is either the number one or two player in its respective category. Why wouldn’t its market cap represent an outsized chunk of the S&P 500 compared with companies that do just one thing, like selling chocolate or making pet food or operating senior living facilities? How many businesses reside within Alphabet? How many standalone billion-dollar plus annual products reside beneath the umbrellas of Apple and Microsoft? Does Tesla make cars or robots? The sprawl of subsidiaries and operating divisions within the Mag 7 names make them each de facto collections of companies, which makes that concentration seem somewhat more explicable compared to, say, if Coca-Cola were to have grown to become 6% of the stock market.

Lastly, they only seem to be in this position permanently. You have to have spent approximately zero time studying stock market history to believe that the current hierarchy is in someway eternal, ordained by God or the S&P Dow Jones index committee. It is not. It will not last. Especially as these companies have begun feverishly competing with each other to the tune of trillions of dollars in capex and billions of dollars in talent recruitment. They are all on offense and defense all the time. Everybody can’t win. No amount of fund flows into Vanguard or State Street, BlackRock or Invesco can stop what’s coming.

Remember your Shelley:

I can’t tell you which of these kings will be left as trunkless legs of stone in the desert, a reminder of fallen empire. I just know that we should be biased to believe it’s inevitable, passive investing bubble or not.

Joe and Tracy on The Compound and Friends!

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It’s the podcast crossover you didn’t even know you needed, but now it’s here and how can you resist?!? One of my favorite things growing up was when I’d be watching my favorite shows and then this would happen:

Or this:

And then I would absolutely lose my mind.

Anyway, Joe and Tracy were amazing on the show. This week they celebrated ten years of their own podcast, Bloomberg’s Odd Lots, which makes them one of the longest running shows in our space. We were thrilled to help them celebrate the milestone.

My old friends Joe Weisenthal and Tracy Alloway on this weekend’s edition of The Compound and Friends. We talked Oracle earnings, the Fed’s rate cut, TIME Magazine’s Person of the Year cover for 2025, the myth of market concentration, our proximity to Dow 50,000 and much more.

Watch or listen at the links below!

Thanks so much for checking in with me. Have an awesome weekend, talk to you soon. - JB

Talk to us.

How’d you do this year? Not just in terms of investment returns, but overall? Do you even know what you own? Have you spent any time trying to figure out what your portfolio exposures actually are, or whether or not there is too much overlap or not enough coverage? What about on taxes? When was the last time you talked to a professional about whether or not your portfolio was even aligned with your real-life goals?

It’s that time of year where people take stock of how things are going. And if it’s been a while, even more reason to.

At Ritholtz we’ve got a staff of 85 professionals across the country, standing by to answer your questions about everything from asset allocation to financial planning, tax to insurance. If you’re ready to get organized and find the answers you’re looking for, my people are ready to help you. Reach out here:

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