The stock market's concentration, in one chart
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The stock market has never been as concentrated as it is now — even after the recent decline in Nvidia stock.
Why it matters: A large amount of the value of the stock market is concentrated in a handful of companies — which is to say, the performance of the stock market as a whole is increasingly a function of how just a few megacap tech stocks are faring.
How it works: One generally accepted way of measuring concentration is to look at the Herfindahl-Hirschman Index, or HHI, more familiar from its use in antitrust enforcement.
- HHI takes a sum-of-the-squares approach: It squares the market share of each S&P 500 component, and then adds all those numbers together.
- If every S&P 500 component was exactly 1/500 (0.2%) of the index, then the sum of the squares — the HHI — would come to 20, the lowest possible score.
- Conversely, if 5 stocks each comprised 10% of the index, accounting for half the total capitalization, while the other 495 were 0.1% each, then the HHI would be 505.
By the numbers: The old high point, set in March 2000 at the height of the Wintel duopoly, was 123. That record was shattered in June 2020, as a handful of high-fliers started to dominate the stock market.
- By August 2020 the S&P 500's HHI reached what was then an all-time high of 159. More recently, with the AI boom, it's risen even higher. By the end of May 2024, it reached 184.
Of note: The most recent spike, in May, is in part an Nvidia story — because the AI chipmaker's valuation rose so fast.
- Still, at the end of May, Nvidia's market capitalization was $2.7 trillion, well below the $3.1 trillion at which it closed on Wednesday. As a result, even after the recent sharp decline in Nvidia shares, the S&P 500 HHI could still set yet another new high this month.
The bottom line: What's far from clear is whether this spike in concentration is bullish or bearish. Concentration will probably retreat from its current highs at some point — but while bears fear devastation in megacaps, bulls look forward to seeing more strength in the rest of the market.
