Market Concentration and Fund Regulation

The U.S. stock market has become highly concentrated. Between 2015 and 2024, the share of the ten largest stocks in total U.S. market capitalization rose from 13% to 31%. In large-cap growth, it rose from 30% to 48%. By the end of 2024, the “Magnificent 7” stocks alone represented roughly one-third of the S&P 500 and more than half of the Russell 1000 Growth Index.

This rise in concentration has received substantial attention, often in connection with market power and the rise of a handful of dominant firms. We examine a different implication. As a few stocks have come to dominate major benchmarks, an old diversification rule has begun to bind, forcing funds to trim the largest stocks, with consequences for fund performance and stock prices.

Figure 2 illustrates why this interaction matters today: stock market concentration has risen rapidly just as mutual funds and exchange-traded funds (ETFs) have become much larger holders of U.S. equities.

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