You might (accidentally) own too much Facebook stock

Is the stock market bubble going to burst?

You’ve likely heard about the need to diversify your investments, to spread out risk so that if one company’s stock tanks, it doesn’t take your entire net worth with it. This is one of the main reasons why index funds are so popular in investing—you get broad exposure to potentially hundreds of companies at once, across sectors and industries, at a relatively low cost.

But what you may not know is that one of the biggest indexes is getting increasingly concentrated, as a few large tech companies have come to dominate it. That’s ringing alarm bells for some observers, as it could indicate a dot-com-like bubble, this time driven by the AI frenzy. And if the bubble bursts—well, it’s very bad for all our 401(k)s.

The S&P 500 is an index tracking the stock performance of 500 large U.S. companies, and it is used as the foundation for a lot of investment products. If you are an index fund investor, your stock funds probably track the S&P.

Just seven companies out of FIVE HUNDRED make up over 30% of the S&P 500 market cap. That makes some experts nervous.

Now, a small group of tech companies called the Magnificent 7 makes up over 30% of the S&P’s market cap. This means if you do have investments that track the S&P, your holdings of Nvidia, Amazon, Apple, Meta, Tesla, Alphabet, and Microsoft have likely been increasing, making up a greater portion of your total portfolio. This will depend on your individual holdings—companies structure index funds and ETFs differently—but that’s generally how it works. You can check your fund’s prospectus to get a breakdown of what it invests in (here’s one example from Vanguard). Don’t be deterred by all the jargon.

So why is this a big deal? The Mag 7 AI craze has been driving the S&P to hit record high after record high in recent months. As a result, the number of 401(k) and IRA millionaires has soared—you’ve likely noticed your own stock portfolios doing quite well—and tech billionaires are making a killing. But what happens if (or when) the AI hype dies down?

Market observers and financial media have said the continued highs hit by the U.S. stock market feel…off. Aside from the brief tariff-related plunge earlier this year, stocks seem inured to bad economic data. There is clear weakness in the labor market, companies are publicly fretting about the effects of tariffs on earnings, inflation is accelerating, and consumer spending is slowing. Yet nothing seems to stop the market’s climb.

@kylascanStock market concentration #economics #jeromepowell

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We don’t give investment advice or pick stocks on The Purse, but one way to mitigate risk is to make sure you’re not invested in a bunch of different index funds that all replicate each other—so if you have a core stock market index fund but also a tech growth fund, you’re basically paying twice for the same exposure. Experts advise that truly diversified portfolios also include some global stocks and bonds.

Next week, the Federal Reserve will meet and likely cut interest rates due to some of that bad economic news highlighted above. Rate cuts are usually seen as good for stocks, meaning even higher highs could be reached. (A Fed rate cut could also be good news for your credit card APRs but not so great for the interest rates on your high-yield savings account.)

Still, a weakening labor market and tariff-related inflation could finally catch up with stocks. It’s impossible to predict. (Don’t let anyone tell you otherwise.) Perhaps the most important thing to keep in mind during all this uncertainty is to avoid trying to time the market and panicking if we do see the bubble burst. We’re all playing the long-game here.

-Alicia

The stock market in the news

• Investors have been warned about the mega-cap tech stock concentration for years, and yet…the market “has mostly continued up and to the right.”

• Though there are technical rules for which companies can comprise many stock indexes, that isn’t exactly true for the S&P 500. Instead, a secretive committee at S&P Dow Jones Indices decides what companies are in and what companies are out.

• Apollo Global Management recently published a chart book showing “the extreme AI concentration within the S&P 500’s market cap, returns, earnings, and capex” if you want to explore further.

• This is a bit in the weeds, but Alicia wrote a story for Fortune earlier this summer about what it means when fewer companies are setting record-highs in a flourishing market. Bankrate has a more in-depth look at the dynamic.

• Jeff Sommer at The New York Times does a good job writing consumer-friendly columns about the stock market and other economic news if you want to learn more.

Friends of The Purse

• Alicia is working on a story for The Purse about student loans, and we want to hear your experience! She’s specifically looking for 30-something millennials who are still paying off their loans and have feelings about them. Fill out this form!

• Just a reminder that Lindsey is hosting a webinar all about estate planning with Steward on Thursday, September 25 at 12:00 p.m. EST. RSVP here. Also, check out The Purse Guide to Estate Planning, which is packed with helpful 101 info on the basics of wills, trusts, and powers of attorney.

• Over at Money Moves, Alicia wrote about career pivots and rising energy costs. One is inspiring and one is frustrating! Both are such good reads!

• Rachel Lipson at Brooklyn Family Travelers is launching a new card strategy salon, a live Q&A on September 16 at 12:00 p.m. ET, to discuss all things credit card points. It’s free for her paid subscribers, or $10 for the one-time session. Rachel has such a wealth of knowledge on this topic, this is sure to be a worthwhile event!

• We love to cheer on friends, and we were thrilled to see Heather and Douglas Boneparth in The New York Times this week talking about their forthcoming book, Money Together. Lindsey loves it (and wrote a blurb for it), and you can preorder it now!

• On Money Changes Everything , Ally Jane Ayers takes on scams and scammers, a topic that is thoroughly terrifying, but her advice is straightforward and nonjudgemental.

• And in her newsletter Dumb Rich, Ariel LaFond answers a juicy reader question on marriage and whether you should pay your spouse back expenses.

Other things we love

• My current morning TV show is the final season of Never Have I Ever. I delayed watching this season because I love this show so much. It’s funny and sweet and has so much heart. But also, I’m not sure what to watch next. Any suggestions? -Lindsey

• GQ’s latest issue explores masculinity in America in 2025, and Glen Powell is the cover star. The feature’s photography really grabbed me; it’s been a while since I’ve felt compelled to buy a physical magazine due to the art direction. -Alicia

• On Alicia’s recommendation, I’ve been listening to We Might Just Make It After All by Elyce Arons, the long-time friend and business partner of Kate Spade. It’s so interesting and inspiring to learn about their back story. -Lindsey

• New Mexico is the first state to provide free child care! “The initiative is expected to save families $12,000 per child annually,” according to The 19th. We hope this is the start of a new trend! -Lindsey and Alicia

The best money we spent this week

• I mourned the closing of Party City earlier this year, but I’m lucky to live in a neighborhood with a lot of party-supply stores. My son, Freddy, and I had a great time picking out paper plates, shiny gold tablecloths, and balloons for his ninth birthday party at one such local shop, and it felt good to support a small business. ($100) -Lindsey

• I’ve played Sudoku daily since high school, and I have used the same iPhone app to get my gaming fix for over a decade. It occurred to me this week that I might be able to pay to make the ads that have increasingly disrupted the app’s gameplay go away. Best $10 I’ve spent in months! -Alicia

What’s the best money you spent this week?