For well over a century, Wall Street has provided a pathway for everyday investors to build their wealth. The annualized returns for the iconic Dow Jones Industrial Average (^DJI 0.40%), benchmark S&P 500 (^GSPC 1.02%), and growth-fueled Nasdaq Composite (^IXIC 2.02%) have easily outpaced the annualized returns of bonds, housing, and commodities spanning multiple decades.

However, short-term directional moves in the major stock indexes are considerably harder to predict as evidenced by all three major indexes vacillating back and forth between bull and bear markets since this decade began.

A visibly concerned person looking at a rapidly rising then plunging stock chart on a tablet.

Image source: Getty Images.

Though there's no perfect blueprint or concrete formula that can accurately tell investors what's to come for the Dow Jones, S&P 500, and Nasdaq Composite, there is certainly an abundance of breadcrumbs for investors to follow. One of these proverbial breadcrumbs has seen the broad-based S&P 500 make history in a way that's traditionally been bad news for Wall Street.

The benchmark S&P 500 is more top-heavy than it's ever been

Since 1957, the S&P, as we know it today, has contained 500 components. Having 500 of the largest publicly traded companies in the index arguably provides a better barometer of Wall Street's health than the Dow or Nasdaq Composite.

However, the above statement only holds true if the S&P 500 is getting fair representation from all of its components. Although it's a market cap-weighted index, and it certainly makes sense for larger businesses to have more "say" in the overall direction of the S&P 500, a top-heavy index has rarely, if ever, been a good thing for Wall Street or investors.

Since 2023 began, the "Magnificent Seven" have done most of the heavy lifting for the S&P 500 and Nasdaq Composite. The Magnificent Seven are comprised of Apple (AAPL -0.35%), Microsoft (MSFT 1.82%), Amazon, Alphabet, Nvidia, Meta Platforms, and Tesla. But the representation from the largest two components -- Apple and Microsoft -- is what's rightly turning heads.

As you can see in the post above by Charlie Bilello, the chief market strategist at Creative Planning, Wall Street's dynamic duo has made history. When Bilello posted this chart on Nov. 7, Apple and Microsoft collectively accounted for 14.4% of the S&P 500's weighting, which is an all-time record. As of the closing bell on Nov. 10, 2023, this weighting had expanded to nearly 14.7%.

On a correlative basis, previous peaks in the weighting of the S&P 500's top-two holdings have preceded stock market corrections, such as in 1982, or bear markets, like the steep decline witnessed during the financial crisis in 2008.

To be abundantly clear, a top-heavy S&P 500 isn't, in itself, a reason for the broader market to head lower. Rather, it's that the companies with the highest weightings have far less wiggle room to fail. If Apple and/or Microsoft were to disappoint investors with their future growth prospects, it would be a recipe for a stock-market correction given their outsized weightings.

On one hand, Microsoft has continued to fire on all cylinders. The company's cloud-infrastructure service segment, Azure, is gaining market share on Amazon Web Services (AWS). But it's a different story for Apple, which is near the top-end of its valuation range dating back to 2011.

Although Apple narrowly avoided a year-over-year earnings decline in fiscal 2023 (Apple's fiscal year ended on Sept. 30, 2023), sales for iPhone, Mac, iPad, and wearables all declined from the prior-year period. With Apple's growth engine stalled at the moment, it and the S&P 500 are vulnerable to downside.

A smiling person reading a financial newspaper while seated at a table in their home.

Image source: Getty Images.

Wall Street has a lengthy track record of transferring wealth to the patient

Considering what's happened previously when the S&P 500 has been highly concentrated, and taking into account a handful of metrics and predictive indicators that suggest the U.S. economy could be headed for a recession, the next couple of months or quarters may be challenging for traders. For patient investors, however, it'll just mark another period of opportunity to grow their wealth.

As much as investors may dislike the unpredictability and velocity of downside moves in the stock market, corrections and bear markets are a normal and inevitable part of the long-term investing cycle. Based on data provided by sell-side consultancy firm Yardeni Research, there have been 39 corrections in the S&P 500 totaling 10% or more since the start of 1950. On average, investors are navigating a double-digit pullback in the broad-market indexes every 1.9 years.

But just as corrections are inevitable, so are long-winded periods of expansion for the stock market.

In June, investment analysis company Bespoke Investment Group released data that examined the average length of bull and bear markets for the S&P 500 dating back to the start of the Great Depression in September 1929. Whereas the 27 bear markets studied lasted an average of 286 calendar days, the 27 bull markets clocked in at an average length of 1,011 calendar days.

^SPX Chart

^SPX data by YCharts.

All told, there have been eight bull markets since 1942 that have lasted between four and 12 years. Furthermore, 13 bull markets since 1935 have lasted longer than the lengthiest bear market on record (630 calendar days, Jan. 11, 1973 to Oct. 3, 1974), according to Bespoke's dataset.

However, the most convincing dataset that demonstrates the value of time for investors comes courtesy of Crestmont Research. The researchers at Crestmont examined the rolling 20-year total returns, including dividends, of the S&P 500. Since most S&P components could be found in other indexes prior to its inception in 1923, researchers were able to back-test their dataset to 1900, yielding 104 rolling 20-year periods (1919 to 2022).

What Crestmont's dataset showed was that all 104 rolling 20-year periods generated a positive total return. Hypothetically speaking, it wouldn't have mattered if an investor purchased at the peak or perfectly timed a trough; they would have made a positive total return if they simply held onto an S&P 500 tracking index for 20 years.

Though periods of high concentration for the major stock indexes have, historically, not been particularly good news for Wall Street, it's tough not to be excited about the future given the extensive amount of data that supports long-term, optimistic investors.