The “Magnificent Seven” has captured the investing spotlight in recent years, driving broader market returns since the start of 2023. But a little over a month ago, many Magnificent Seven stocks were down big in 2026. And at multiple points this year, all seven were underperforming the S&P 500 (^GSPC +0.77%). But since the start of April, incredible earnings reports, guidance, and investor optimism for easing geopolitical tensions have propelled the group to new heights.

Nvidia (NVDA +4.39%), Alphabet (GOOG 0.47%) (GOOGL 0.49%), Apple (AAPL 0.27%), Microsoft (MSFT +1.03%), Amazon (AMZN 1.15%), Meta Platforms (META +0.30%), and Tesla (TSLA 0.44%) have gained a combined $4.8 trillion since the start of April.

To put that figure into perspective, consider that no U.S. company was worth more than $1 trillion until August 2018. And the total market cap of the S&P 500 is around $68.2 trillion at recent prices, meaning the added value of the Magnificent Seven since the start of April would be about 7% of the index.

But concentrated gains are a double-edged sword. While growth investors have benefited from the big getting bigger, that growth adds considerable risk to the U.S. market, especially through major indexes like the S&P 500 and the Nasdaq-100, which consists of the 100 largest non-financial companies of the Nasdaq Composite (^IXIC +0.88%).

Here’s a look at what’s driving these market-leading stocks to new heights, why the big companies keep getting bigger, and what it means for investors looking to maintain diversified portfolios.

Magnificent Seven dominance

As of market close on Thursday, over half of the S&P 500 was in just 20 stocks, and over 80% of the Nasdaq-100 was in 19 stocks. At first glance, it looks like textbook market euphoria, akin to the dot-com bust roughly 25 years ago or the stock market crash of the early to-mid-1970s.

While there are examples of smaller red-hot growth stocks at sky-high valuations, the Magnificent Seven (except Tesla) are earnings-driven stories. This means stock prices are going up because revenue growth is accelerating and margins are staying high.

Data source: YCharts.

Unlike the hot stocks of those previous eras, today’s tech leaders aren’t as constrained by the physical world or consumer appetites. Their digital frontiers offer virtually limitless growth opportunities. Nvidia generates over 90% of its revenue from data centers but has significant upside potential in physical artificial intelligence (AI) across end markets like robotics and self-driving cars. Similarly, the majority of Alphabet’s business is still Google Search, but it also powers its Gemini large language models, which have synergies with YouTube, Google Cloud, and Waymo.

The blueprint for many of today’s largest companies is to pair a reliable stream of cash flow from a proven yet innovative business with a leading position in new markets. The result is a snowball effect. The core business grows, funding new opportunities. Those opportunities eventually reach positive free cash flow and then fund more ventures. The best example is Alphabet, where cash flow from Google Search helped scale YouTube, which in turn provided cash to help grow Google Cloud, which is now contributing to Alphabet’s AI investments and other bets like Waymo. The only limiting factor seems to be antitrust intervention, but that is highly unlikely under the current administration.

Managing risk in today’s market

There’s a lot of talk about how the market is expensive compared to historic valuations. And while it’s true that the S&P 500’s forward price-to-earnings ratio is relatively expensive, the index arguably deserves a premium valuation considering how much higher-quality its components are now than when the S&P 500 was dominated by lower-growth consumer-facing companies, industrial conglomerates, and energy majors.

So while valuation is worth monitoring, at least the premium price is grounded in logic. The bigger concern for individual investors is the composition of the major indexes. A staggering 35% of the S&P 500 was made up of tech stocks as of April 30. If Alphabet, Meta Platforms, Amazon, and Tesla were in the tech sector, it would have been more than half.

Buying and holding an S&P 500 index fund simply doesn’t provide the diversification it once did, because the U.S. stock market has become much more of a growth index. And the Nasdaq-100 is even more extreme. The major indexes can swing based on the performance of a handful of stocks. And a cooldown in the AI investment narrative or AI energy bottlenecks squeezing tighter could spark a major sell-off or even a bear market.

Even with these risks, investors shouldn’t smash the sell button and run for the exits, as buying and holding quality companies tends to pay off over the long term. And the major indexes have had plenty of periods in history when they became overly concentrated, only to balance out over time.

Rather, a better approach is to simply be aware of what’s driving the market and the cracks that could form. If you own index funds or exchange-traded funds that are weighted by market cap, like the S&P 500, then you may have more exposure to growth stocks than your risk tolerance can handle.

Alternatively, investors could consider the Invesco S&P 500 Equal Weight ETF (RSP +0.36%), which weights each S&P 500 component equally rather than by market cap — meaning that a relatively small S&P 500 component like Domino’s Pizza will have the same impact as Nvidia. Another approach could be to invest in funds with less exposure to growth stocks, like the Vanguard Value ETF (VTV +0.31%), which charges an identical 0.03% expense ratio to the Vanguard S&P 500 ETF but doesn’t hold any Magnificent Seven stocks. It holds many of the value-oriented components of the S&P 500, which could make it a good fit for risk-averse investors or folks who don’t want to keep adding to their growth stock positions.

All told, it’s easy to gloss over concentration risks when the market is making new all-time highs. But when the tide goes out, it’s the portfolios that were overly concentrated or leveraged that get exposed.