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From Blue Chips to Micro Chips: How Market Leadership Has Transformed
By: Chris McDonough, Investment Performance Services, LLC
This article highlights how public equity markets have become more concentrated, U.S.-dominated, and driven by intangible-rich technology firms, reducing traditional diversification. Public pension trustees should reassess portfolio construction to address rising concentration risk and consider complementary strategies, including selective private market exposure, to access early-stage growth.
This is an excerpt from NCPERS Summer 2025 issue of PERSist.
Public equity markets have undergone a dramatic transformation in recent decades. Once dominated by industrial “blue chips,” the U.S. stock market is now led by capital-light technology firms, “micro chip” companies, that command increasing influence over index performance and capital flows. This shift carries important implications for institutional asset allocators managing long-term portfolios.
A Look Back: The Age of Blue Chips
The term "blue chip" originates from the game of poker, where blue chips traditionally represent the highest value among the standard chip colors. While the term is believed to have been first used in relation to investing in the 1920s to describe high-priced stocks, its meaning has evolved and now represents companies that are well-established, financially sound, and considered industry leaders.
The Dow Jones Industrial Average (DJIA), launched in 1896 to track the U.S. economy, is often referred to as the “Blue Chip Index.” The original 12 companies included in the DJIA reflected the manufacturing backbone of the American economy — steel, oil, and railroads. While the Dow has expanded to 30 companies, its methodology has essentially not changed. It remains a price-weighted index that lacks diversification and adapts slowly to changes in the economy. As a result, it is rarely used today as a benchmark by institutional investors.
Market Evolution and the Rise of “Micro Chip” Companies
The global equity market has surged to $115 trillion in capitalization, up from $36 trillion just 20 years ago. Three primary forces fueled this growth:
- Ultra-low interest rates over the past 15 years have driven higher equity valuations, as well as enabled corporations to finance stock buybacks at a lower cost.
- The rise of intangible assets, such as software, data, and intellectual property, allows tech and service firms to scale rapidly without the capital intensity of traditional manufacturing.
- Aggressive fiscal stimulus supported consumer consumption and boosted corporate earnings.
The U.S. Tech Domination and Index Concentration
As markets evolved, so did the composition of indexes. In the MSCI All Country World Index (ACWI), which encompasses 85% of the world's listed equities, the U.S. portion has increased from below 50% in 2004 to over two-thirds today. Meanwhile, the technology sector's representation expanded from 10% to 26%.
This shift reflects the economic transition to digital platforms (cloud, e-commerce, AI, software), where U.S. firms lead in growth, profitability, and innovation. Their asset-light, high-margin business models attract investor capital and have driven valuations, thus increasing market concentration sharply. The top 10 largest holdings in the S&P 500 represented 39% of the index at the end of 2024, up from 21% in 2004. Within the Russell 1000 Growth index, the concentration is even more extreme, with the top ten names representing 61% at the end of 2024.
This concentration is a double-edged sword for allocators. While these companies delivered exceptional growth and margins, their sheer size and influence make portfolio diversification more difficult. Additionally, it increases exposure to sector-specific risks, such as regulatory crackdowns or technological disruption.
Fewer, Older IPOs — Less Opportunity for Public Investors
Another key trend impacting market structure is the shrinking number of publicly listed companies. In 2000, there were approximately 8,000 listed companies in the U.S.; today, there are fewer than 5,500. Meanwhile, the number of private equity-backed companies has increased tenfold to over 12,000. Being publicly traded can be costly due to regulatory requirements and public companies face pressure to meet short-term investor expectations. Therefore, many companies are choosing to stay private for longer, with venture capital and private equity funding growth through more of their life cycles and keeping early-stage growth in the private markets.
For public pension trustees, this means traditional public equity markets may no longer provide the same access to innovation or early-stage growth that they once did. As the universe of publicly listed opportunities contracts, investors must think more creatively about diversification.
Implications for Fiduciaries
In summary, public equity markets have become increasingly U.S.-dominated, tech-heavy, and concentrated over the last two decades. At the same time, private capital is capturing a growing share of the early growth and value creation of smaller companies, leading to a decline in public market diversification.
The rise of “micro chips” over “blue chips” is more than a metaphor; it is a structural shift that requires a reassessment of traditional investment assumptions. Trustees must ensure their portfolios are equipped to navigate a more concentrated and tech-heavy equity market. That means balancing exposure to market leaders with vigilance around valuation risk and reconsidering how to access the full spectrum of growth opportunities in both public and private markets.
Bio: Christopher McDonough is the Chief Investment Officer and a Senior Consultant at Investment Performance Services, LLC and is responsible for developing and implementing investment policy for the firm. In addition, he works on all aspects of client funds including investment policy formulation, asset allocation strategies, performance monitoring, and manager searches. He serves as Chairman of the IPS Investment Committee and a frequent speaker at educational conferences. Prior to joining IPS in 2018, Mr. McDonough was the Chief Investment Officer for the approximately $79 billion New Jersey Public Employees Retirement System. During his tenure, the State was frequently recognized for its innovative investment strategy and strong performance. Prior to New Jersey, Mr. McDonough spent ten years with the City of Philadelphia Public Employees Retirement System where he was the Chief Investment Officer of the defined benefit plan and deferred compensation plan with combined assets in excess of $4.5 billion.
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