For decades, buying the S&P 500 was sold as a simple way to get broad exposure to the American economy. In Israel especially, it became a popular wrapper for pension and savings money, with more than 200 billion shekels now invested in S&P 500 tracking products. The authors, a CEO and a manager at consulting firm Complex, argue that this no longer means true diversification.
They cite SPIVA data showing that over the past 20 years, about 93% of actively managed U.S. large-cap funds lagged the S&P 500, with average annual returns of 8.86% versus 11% for the index. But they say that success was heavily supported by a four-decade macro backdrop that is ending. A Reuters report and Federal Reserve research they reference say falling rates, cheaper debt and lower corporate taxes helped drive more than 40% of real earnings growth between 1989 and 2019. U.S. 10-year Treasury yields fell from 15% in the early 1980s to around 0.6% in summer 2020, while the corporate tax rate dropped from above 50% at its peak to 21% in 2017.
The article says that environment is changing. Today, the 10-year yield is around 5%, inflation pressures suggest it may not fall soon, corporate taxes are unlikely to keep dropping, and the massive U.S. deficit, with debt to GDP already at 100% and potentially reaching 130% within a few years, could keep rates high. At the same time, aging baby boomers are moving into retirement and beginning to reduce risk and withdraw money from equities.
A second problem, the authors say, is that market-cap weighted index funds now shape the market rather than merely reflect it. By the end of 2025, about 53% of U.S. stock investments were held in such products, up from 2% in the early 1990s. In the S&P 500, the 10 largest companies rose from 19% of the index in 2014 to 41% at the end of 2025, while contributing only about 31% of profits. Since the current bull market began in October 2022, those 10 stocks rose about 175%, versus 100% for the index and under 60% for the rest of the companies. Because these giants are heavily tilted toward technology and massive AI spending, the authors say the S&P 500 has become a leveraged wager on AI success, not a bet on the full U.S. economy. They warn that if that single scenario disappoints, the same stocks that lifted the index could drag it down sharply.
Their recommendation is to stop treating the S&P 500 as an automatic solution. They urge investors to consider equal-weight indices, smart beta strategies such as value, low volatility or dividend screens, and a larger active allocation. Their bottom line is that passive investing is not dead, but blind passivity should end, and investors should look closely at what their index really contains.
