The U.S. public market is smaller and more concentrated than it has been in decades, and S&P 500 concentration risk now sits at historic highs. At the same time, a growing share of economic value is being created in private markets, which means a passive index portfolio can offer far less diversification, and far narrower economic participation, than it appears to.
The U.S. public equity market has undergone a structural transformation over the past two decades. The number of publicly traded companies has declined materially, index concentration has reached historic levels, and a growing share of economic growth now occurs outside the public markets altogether.
The U.S. public equity market is smaller, more concentrated, and carrying higher valuations than at any point in modern market history. For sophisticated advisors who benchmark against it, that combination is a direct constraint on what public equities alone can reasonably be expected to deliver for clients over the next decade.
For advisors responsible for long-term portfolio construction, these are no longer abstract market observations. They directly affect diversification, forward return expectations, and the opportunity set available to client portfolios.
At the same time, private markets have expanded into a mature and increasingly institutional asset class ecosystem encompassing thousands of revenue-generating businesses that public market investors no longer access.
Together, these shifts are forcing a broader reassessment of what modern portfolio construction should look like in an environment where traditional public equity exposure may provide less diversification and narrower economic participation than many investors realize.
Key Takeaways
- The number of publicly traded U.S. companies has nearly halved since 1996.
- S&P 500 concentration is at historic highs, with mega-cap technology companies driving a disproportionate share of returns.
- Several major institutions now forecast materially lower forward returns on public equity.
- Private markets increasingly contain the majority of meaningful U.S. businesses and growth-stage value creation.
- Advisors may need broader portfolio construction frameworks to address concentration and opportunity-set risk.
The Public Market Has Shrunk While Private Markets Expanded
The number of U.S. public companies has nearly halved from roughly 7,300 in 1996 to approximately 4,300 today. What makes this figure meaningful is what happened on the other side of the ledger. During that same period, private equity-backed companies grew from 1,900 to more than 11,200, a nearly 500% increase. (CrowdStreet)
JPMorgan Chase CEO Jamie Dimon addressed this directly in his 2024 shareholder letter, calling the declining role of public companies in the American financial system a serious trend. “The total should have grown dramatically, not shrunk,” he wrote. (CrowdStreet)
The cause is not a contracting economy.
Columbia Business School research suggests regulatory compliance costs account for only a fraction of the decline. The more significant driver is the growing availability of private capital. Companies are staying private because they now can in ways they previously couldn't. As one Columbia researcher put it: companies can raise capital at high valuations and no longer need to tap the public markets to grow.
The practical consequence is that a growing share of substantive, revenue-generating U.S. businesses are simply no longer accessible through public markets, and that share has expanded significantly over the past two decades.
How does concentration risk hide inside passive index funds?
Even if the shrinking number of public companies doesn't concern your clients today, what's happening inside those companies should. The S&P 500 has delivered strong headline returns in recent years — but those returns have been increasingly narrow.
Concentration in the S&P 500 is now at an all-time high, with the 10 largest companies accounting for roughly 40% of the index’s total market capitalization, approximately double the concentration seen in 2015 and 2016. In 2026, the so-called Magnificent Seven, Apple, Microsoft, Amazon, Alphabet, Tesla, Nvidia, and Meta, still make up around a third of the S&P 500’s total market capitalization. (Guinness Global Investors; Investment News)
The top five stocks in the S&P 500 alone account for about 27% of the index’s market capitalization, well above historical peaks. Passive index funds, which mirror these weightings, deliver what appears to be broad market exposure but in practice concentrate risk in a handful of companies and a single sector theme. (Charles Schwab)
Morningstar put it plainly in a December 2025 analysis: when a handful of stocks do most of the heavy lifting, portfolios tied to broad benchmarks become less diversified than they appear, creating exposure to only a few business models, sectors, and factor profiles, which quietly dominate overall risk.
What Market Concentration Means for Future Equity Returns
High concentration has historically been associated with lower forward returns. Goldman Sachs’ equity strategy team, led by David Kostin, forecast in late 2024 a 3% annualized nominal return for the S&P 500 over the next decade, placing that projection in the 7th percentile of 10-year returns since 1930, and well below the 13% annualized return the index delivered over the prior decade.
There are two primary factors: current valuations sitting at the 97th percentile of the cyclically adjusted price-to-earnings ratio over the past century, and an unprecedented level of market concentration, with the largest stocks' market value more than 700 times that of the 75th percentile stock.
This is not a fringe view. Goldman's model projects a 72% probability that bonds will outperform the S&P 500 over the next 10 years — a data point worth considering when discussing portfolio construction with clients accustomed to equity-driven growth.
Private Markets Have Become a Larger Institutional Opportunity Set
The same forces compressing public market opportunities have expanded private market access. Against a backdrop of strong but concentrated public markets, the Cambridge Associates U.S. Private Equity Index returned 8.1% in 2024, exceeding S&P 500 returns over periods longer than three years as of December 31, 2024.
The composition of that private market opportunity has also matured. Companies are no longer going public at early, speculative stages, they are staying private through much of their growth phase. According to IPO research from Professor Jay R. Ritter at the University of Florida, the median age of a company at IPO has tripled since 1999, from 4 years to 12 years, while the median market cap at issuance has grown by more than 300% to over $2 billion. That means the companies that do eventually reach public markets have already extracted much of their early-stage value creation for private investors.
The result is a private market universe that increasingly comprises the kinds of established, revenue-generating businesses once available through public equity. Today, 87% of U.S. companies with revenues greater than $100 million are privately owned. For advisors whose clients hold only public equities, that is the opportunity set they are not accessing. (Hamilton Lane; Meketa Investment Group)
How the Shrinking Public Market Changed Index Construction
One under-appreciated consequence of the shrinking public universe is its impact on index construction. The Russell 2000, for example, is built on a static membership count, it holds stocks ranked 1,001 to 3,000 by size. When the investable universe was larger, that range captured genuinely small-cap companies. With the universe now closer to 4,000 names, the bottom of that range includes companies that would historically have been classified as micro-cap.
The share of ETF and mutual fund assets in passive strategies now stands at 54%. Many of those assets are tied to indices whose construction has quietly shifted risk profiles. Advisors using passive small-cap allocations should understand what those funds hold today; the SEC’s Office of Investor Education and Advocacy classifies micro-cap stocks as among the riskiest types of investments available to investors. (Charles Schwab)
Diversification remains the only reliably free element of portfolio construction. In an environment where a few stocks set the tone for the entire market, maintaining exposure across sectors, return drivers, and asset classes is one of the few dependable ways to manage risk.
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What Advisors Should Take Away From These Structural Shifts
The structural trends of a contracting public company universe, record index concentration, muted forward return expectations from major institutions, and a maturing private market opportunity set converge on the same conclusion.
Portfolios built primarily on market-cap-weighted public equity indices carry more concentrated risk today than at any point in the past 25 years, and the opportunity set available through that channel has narrowed substantially relative to the broader economy.
For qualified clients, private equity and private credit allocations address both sides of that equation: reducing reliance on a concentrated public market and expanding access to a universe of companies that has grown dramatically while public market participation has declined. The question for advisors is not whether to explore this, it is how to do it in a way that fits each client’s liquidity needs, time horizon, and risk profile.
That conversation starts with education. Advisors who can clearly explain the structural dynamics are better positioned to elevate their clients’ understanding and differentiate their practice in the process.
This material is for informational and educational purposes only and does not constitute investment advice or a solicitation to buy or sell any security. Private market investments involve risk, including potential loss of principal, illiquidity, and are appropriate only for qualified investors. Past performance does not guarantee future results.
¹ Wilshire Indexes Research, "Avoid the Size Trap," April 2024. wilshireindexes.com
² Jamie Dimon, JPMorganChase Annual Report 2024. jpmorganchase.com
³ Jay R. Ritter, University of Florida Warrington College of Business, IPO Data. site.warrington.ufl.edu/ritter/ipo-data
⁴ Hamilton Lane, "Private Market Investing: Staying Private Longer Leads to Opportunity," April 2022. hamiltonlane.com
⁵ U.S. Securities & Exchange Commission, Investor Bulletin: Microcap Stock Basics (Part 3 of 3: Risk), October 2016. sec.gov