An S&P 500 fund can feel like a broadly diversified way to own U.S. stocks. Kenny Polcari, senior market strategist at SlateStone Wealth, says that assumption warrants a closer look, given that large technology companies are driving a disproportionate share of the index.
He estimates that technology accounts for close to 40% of the market-weighted S&P 500, meaning an investor who adds a technology-sector ETF on top of an index fund may be taking far more technology risk than intended. His response is to understand the holdings, consider an equal-weighted alternative for part of the broad-market allocation, and avoid putting every dollar to work at once when market conditions are unsettled.
Polcari’s point is not that investors should abandon the S&P 500 or technology stocks. He counts names like Microsoft, Apple, Amazon, Meta Platforms, Micron Technology, IBM, Fortinet, and CrowdStrike among the companies he follows or owns. His argument is narrower: A portfolio’s label can hide its actual exposures, and that matters more when investors are worried that rising Treasury yields could pressure expensive, fast-growing stocks.
Here is how Polcari thinks through that risk, and where his approach may fit for investors with different time horizons.
Why a market-weighted S&P 500 fund can concentrate technology risk
The S&P 500 is a market capitalization-weighted index, which means its largest companies receive the largest positions. When a small group of very large technology companies rises faster than the rest of the market, those companies come to account for a larger share of the index. A fund designed to track the market-weighted S&P 500 follows that same structure.
That construction differs from an equal-weighted index, which gives each constituent the same starting weight and periodically rebalances back toward that allocation. An equal-weighted S&P 500 fund still owns the companies in the index, but it does not give the largest companies the same influence over returns. Polcari sees that distinction as especially relevant for investors who believe they own a neutral broad-market fund but also hold dedicated technology funds.
You’re sitting in an S&P 500 fund. Do you realize how much of that is exposed to tech? It’s close to almost 40%, right? The tech weighting in the S&P is, I think, close to 40%. So all these people that say, ‘Oh, look, I’m in an S&P fund. I’m OK.’ Be careful, because you’ve got a lot. You’re overweighted in technology.
Kenny Polcari, when asked how retail investors in S&P 500 funds should prepare for a possible pullback
Polcari’s estimate is his assessment, not a figure from an index provider, but the portfolio logic does not depend on a precise percentage. An investor who owns a market-weighted S&P 500 fund and then buys the Technology Select Sector SPDR Fund or the iShares U.S. Technology ETF adds another layer of exposure to many of the same large technology companies. The overlap can be easy to miss because each fund has a different name and a different stated purpose.
The practical question is not whether technology is a good long-term investment. It is whether the investor has deliberately chosen the size of that technology position. A portfolio can be diversified across hundreds of stocks and still be heavily influenced by a single sector if that sector accounts for the largest holdings.
Related: Kevin Mahn: Market timing will cost you big
Why Polcari considers equal weight for broad-market exposure
Polcari’s proposed adjustment is to allocate more to a broad-market index fund, such as an S&P 500 Equal Weight Index fund, rather than relying entirely on a market-weighted S&P 500 fund. He said the equal-weighted S&P 500 was up almost 10.5% for the year at the time of the discussion, compared with 12% for the market-weighted S&P 500. Those returns describe the period discussed in the segment, not a forecast of future performance.
The gap illustrates the trade-off. A market-weighted fund can benefit more when the largest technology companies lead the market. An equal-weighted fund may lag in that environment because it gives less influence to those winners. Polcari believes the reverse could happen if technology shares fall sharply: The market-weighted index could be hit harder because its largest positions carry more weight.
If tech gets whacked, then the S&P, the market-weighted S&P, is going to get whacked. But the S&P equal weight won’t react as much. So if you want the exposure, because you want broad-market exposure, then put more money into the equal-weight S&P versus the regular-weight S&P.
Kenny Polcari, when asked what S&P 500 fund investors could do about technology concentration
Polcari’s wording is important. He says equal weight may react less, not that it will protect an investor from a broad decline. Equal-weighted funds still own stocks, including technology stocks, and can fall when the overall market falls.
They also require periodic rebalancing, which means the strategy regularly trims companies whose weights have grown and adds to companies whose weights have shrunk. That can help reduce concentration, but it can also leave the fund behind during a prolonged rally led by a small number of mega-cap companies.
Related: The hidden opportunity beyond the S&P 500’s mega-caps
How Treasury yields shape Polcari’s caution on technology stocks
Polcari’s concern about concentration is tied to his broader market view. During the segment, he said the 10-year U.S. Treasury note yield had reached roughly 5.21% to 5.22%. Higher Treasury yields can affect stock valuations because investors can earn more on government securities, which are generally viewed as having less credit risk than stocks. Higher yields can also make investors less willing to pay high prices for companies whose expected earnings are further out.
He said technology and high-growth stocks could be among the first areas pressured if yields continue rising. That is why he described himself as owning technology without chasing it at current levels. In his view, a company can remain attractive while its stock is too expensive to add to aggressively on a particular day.
Polcari said he had reassessed the yield level he considers concerning after the market held up around 5.2%. He described a range roughly between 5.3% and 5.5% on the 10-year U.S. Treasury note as a potential danger zone. If yields reached that range, he said he would become more cautious about putting new cash into stocks, though he would not automatically sell high-quality companies whose investment case remained intact.
That is a conditional view, not a prediction that yields will reach those levels or that stocks will decline by a specified amount. Polcari said a further rise in yields could lead to more volatility and could make a pullback larger than the 8% to 10% decline he had expected earlier in the discussion. Investors should treat that as his market judgment, not as a timing signal with a guaranteed outcome.
Who may prefer Treasury income to more equity risk
For investors near or in retirement, Polcari argues that higher Treasury yields directly affect the decision. He said someone in their 60s or 70s may reasonably want to reduce some market risk when Treasury income is available above 5%, particularly if that investor needs portfolio withdrawals soon. He offered an example of setting aside several years of living expenses in Treasuries, leaving the remaining assets with more time to recover from market volatility.
A Treasury allocation has its own trade-offs. It can provide known interest payments if held to maturity, but it may not keep up with inflation over a long period, and investors who sell before maturity can still face price changes. A money market fund also differs from an individual Treasury because its yield can change as short-term rates change. The appropriate allocation depends on cash-flow needs, tax circumstances, investment horizon, and tolerance for losses.
For younger investors with decades before retirement, Polcari takes a different view. He said investors in their 40s or 50s with 25 or 30 years remaining may be able to keep at least market-level equity risk if that fits their circumstances. The key distinction is time horizon. A temporary stock decline can be harder to absorb when withdrawals are imminent than when an investor is still accumulating savings.
How Polcari approaches a stock purchase during a pullback
Polcari does not frame caution as a reason to avoid every purchase. He looks for companies he already likes when their shares are weak and says he prefers adding gradually rather than buying a full position at once. A pullback is simply a decline from a prior price level; it does not prove that a stock has become cheap or that its decline has ended.
GE Vernova was his example in industrials. He said the stock had fallen more than 22% before beginning to find a base, a period in which a stock’s price stops falling persistently and starts trading more steadily. He also cited ASML, saying SlateStone Wealth owned the company and had added to an existing position during weakness rather than chasing it after a positive day.
His test is whether the original reason for owning a company has changed. That requires more work than observing a lower share price. Investors considering a purchase after a decline may want to review the company’s earnings outlook, debt, competitive position, and the specific news that caused the sell-off. A lower price can create an opportunity, but it can also reflect a changed business outlook.
You buy it on weakness because the thesis you own it hasn’t changed. The stock is just going through part of the cycle.
Kenny Polcari, when asked why he was adding to ASML rather than chasing a rally
Polcari applies the same staged-purchase idea to Micron Technology. He said Micron was down 13% from its highs at the time and could be a candidate for an initial purchase, while cautioning that a broader market pullback could push it lower again. His suggested use of dry powder means retaining some uninvested cash for later purchases. It reduces the risk of committing all available capital immediately, but it also creates the possibility that cash will sit on the sidelines while a stock rises.
The approach is better suited to investors who have already decided that they can own the company and can tolerate additional volatility. It is not a substitute for deciding how much of a portfolio should be in any one company. A position bought in stages can still become too large if the investor keeps adding without a portfolio-level limit.
Related: Ross Gerber’s defensive plan for inflationary markets
Where Polcari sees opportunities outside technology
While he described technology as somewhat stretched, Polcari said he was looking at basic materials, health care, financials, and parts of the industrial sector. His premise is that high-quality companies in those areas can come under pressure as part of a market cycle even when the underlying reason to own them remains intact.
He named JPMorgan Chase and Bank of America as financial stocks he would buy, and he named Merck & Co. and Eli Lilly and Company in health care. He also cited the iShares MSCI Emerging Markets ETF as a way to gain emerging-markets exposure after a pullback. Polcari said emerging markets were up 23% for the year at the time of the segment, a figure he presented as a current observation rather than a reason to expect comparable future returns.
His preferences should be read as examples of his own positioning and research priorities. He also said he would avoid consumer discretionary stocks in Q4, while distinguishing that sector from consumer staples. Sector views can change quickly with economic data, interest rates, corporate earnings, and consumer spending, so a single strategist’s shopping list is not a complete portfolio plan.
The takeaway for S&P 500 investors concerned about a pullback
Polcari’s decision procedure starts with a portfolio inventory. Identify every fund and stock you own, look through each fund to its major holdings and sector weights, and add up the technology exposure across the whole account. An investor who is comfortable with that concentration may keep it. An investor who discovers more exposure than intended can consider reducing dedicated technology purchases, shifting part of a broad-market allocation toward equal weight, or adding assets from other sectors.
The next decision is about time horizon. Long-term, buy-and-hold investors who do not need the money soon may be able to tolerate more equity volatility than investors funding near-term retirement spending. Investors who need near-term cash flow may place more value on the income and relative stability of Treasuries or money market funds, while recognizing that the income rate can change and that inflation remains a risk.
Finally, investors considering a pullback purchase can decide in advance how much they are willing to invest initially and how much cash they want to reserve for later. That process will not remove market risk. It can, however, make a portfolio’s technology exposure, cash needs, and reasons for owning each investment easier to understand before volatility forces a decision.
Polcari expects market volatility and sees Treasury yields as a major variable, but his central advice is more durable than a one-month market call: Know what your funds actually own, match risk to the time when you need the money, and avoid confusing a familiar index label with a fully diversified portfolio.