The stock market continues to be extraordinary in the face of distressing headlines, but the growing concentration risk has more investors on edge. The S & P 500 is back at all-time highs as the bull case on Wall Street plays out. The artificial intelligence buildout is ramping up. Corporate earnings are topping expectations. Interest rate cuts seem inevitable, likely coming next month. On top of all that, the One Big Beautiful Bill will be stimulative for an economy where consumers are still spending. But the market’s ascent at a time of seasonal weakness and ongoing inflation concerns has many investors worried. They fear that a stock market priced for perfection, with the S & P 500 currently trading at a 12-month forward multiple of 22, is vulnerable to some sort of setback. And that could come from anywhere. “What’s going to happen, I think, is some shock will occur. I don’t know what shock, but some shock will occur, which undercuts the thesis of continued economic growth,” said David Kelly, chief global strategist at JPMorgan Asset Management. “And when that happens, I think you’ll see a selloff in markets, and that’ll probably be concentrated in those areas that look most overvalued right now.” “So, I think investors ought to be pretty cautious here, because what’s going on is the market slowly getting more and more overvalued,” Kelly said. Top-heavy market More than anything, it’s the top-heavy nature of the market raises concern. Goldman Sachs pointed out this week that the top 20% of quality companies in the S & P 500 — those with massive cash piles and fortress balance sheets — are trading at a 57% price-to-earnings premium to the lowest quality stocks — a gap in the 94th percentile going back to 1995. In practice, that means that the megacaps — which already benefit from AI tailwinds — get a further boost from investors seeking safety from economic uncertainty. Yet, the influence the tech giants wield on the market is troubling in the event of a pullback. AI superstar Nvidia alone now accounts for roughly 8% of the S & P 500, the biggest weighting of any individual stock in the cap weighted benchmark going back to 1981, according to Torsten Slok, chief economist at Apollo Global Management. The stock is easily a key reason for the bull market, after rallying more than 36% this year, surging more than 170% in 2024, and soaring more than 200% in 2023. But, if the bull case for the beloved stock falters, that could spell trouble for the broader benchmark. China, for example, is a key weak point for the stock, as any curbs on Nvidia’s sales of its graphics processing units to Beijing will likely hurt the stock — and also the market. An incoming reversal? The top stocks look especially bloated when you consider this: While the S & P 500 has gained more than 10% in 2025, the median stock has only risen 3%, and remains 12% off its recent high, according to a note from Goldman Sachs this week. To be sure, that could set up the market for big rotations. Small-cap stocks outperformed their large-cap counterparts this week. Value-factor stocks also outpaced growth, while Nvidia slid and Apple advanced. Health care, a recent laggard, led the S & P 500. If the dovish outlook for Fed policy holds, or the macroeconomic picture improves, then the rotation trade could continue to work for investors. And yet, even optimistic investors continue to remain cautious, and are diversifying their holdings. JPMorgan’s Kelly said he prefers assets with limited downside in the event of a pullback. The strategist prefers U.S. value stocks over growth, and said he’s looking abroad to Europe, which he expects has further to run even after its gains this year. Some alternatives such as real estate could also add value to a portfolio, he said. Eventually, Kelly expects some “violent” reaction — a sustained bear market of 20% or more — is overdue for the stock market, whether it comes within a week or in the next three years. “It’s just imperative that investors diversify some of that risk into other industries and other regions in particular,” said Nanette Abuhoff Jacobson, global investment strategist at Hartford Funds. Reversal beneficiaries This past week, Goldman Sachs identified some lower quality stocks with weak balance sheets that could benefit from a reversal trade, if macroeconomic conditions improve or if the Fed turns dovish. Here are five of them. Estee Lauder was one lower quality stock identified. The stock is higher by more than 21% in 2025 but is in the midst of a multiyear turnaround plan that could cost between $1.2 billion and $1.6 billion. Paramount Skydance surged 33% this week alone, after it became a “play for momentum goons” after Paramount Global’s merger with Skydance Media finalized. — CNBC’s Sean Conlon contributed to this story.
