Fourteen point two percent. That was the S&P 500's Q4 2025 earnings growth rate when FactSet first updated it late in the reporting cycle, later settling at a blended 13.2%. It was the fifth consecutive quarter of double-digit earnings expansion. And yet, the loudest conversation in markets right now is whether passive investing is inflating a bubble.
You know the argument. Money flows into index funds. Index funds mechanically buy the biggest stocks. The biggest stocks get bigger. Repeat until something breaks. The Economist ran a provocative piece on it in early 2026. Bank of America called passive a "critical mass" risk. Michael Burry, who has predicted approximately twelve of the last two crashes, says AI is a bubble "too big to save."
I have a simpler framework: are the companies at the top of the index earning their weight? The answer, as of this earnings season, is unambiguously yes.
The Numbers Behind the Noise
The shared evidence base tells you the Magnificent 7 now account for 28% of the S&P 500. The Shiller CAPE is near 40. Passive funds hold 55% of U.S. fund assets. All true. All insufficient to call this a bubble.
What those facts omit is the earnings story underneath the market cap story. The Mag 7 reported actual earnings growth of 27.2% in Q4 2025, up from 18.4% in Q3. Six of the seven beat EPS estimates. That marks the tenth quarter out of the last eleven that these companies grew earnings above 25%. The "other 493" companies in the index? They posted 9.8% growth. Solid, but not spectacular.
Technology-driven enterprises accounted for 66% of the S&P 500's total year-over-year EPS growth in Q4 2025. That sounds alarming if you are looking for things to be alarmed about. It sounds rational if you note that the Information Technology sector posted net margins of 29.0%, up from 26.8% the prior year. These are not paper gains. They are cash-generating machines with record profitability.
FactSet projects 14.7% earnings growth for the full calendar year 2026. Revenue growth estimates sit at 7.7%. The forward P/E ratio on the S&P 500 is 21.6, above the 10-year average of 18.8, but not dramatically so when you account for the composition of what you are buying. A market dominated by 29% net-margin businesses should trade at a premium to a market dominated by banks and energy companies. This is not complicated.
Concentration Is Not a Crime
The passive-bubble crowd makes a structural argument: cap-weighted indexes create a reflexive loop where big stocks get inflows simply for being big, disconnecting price from fundamentals. Valentin Haddad's 2021 paper suggests markets are 11% less responsive to price changes because of passive growth. Respected work. But 11% less elastic does not mean markets have lost the ability to price assets.
Active investors still account for 95% of daily trading volume. Passive holdings represent roughly 13% of direct stock market ownership, per Bloomberg Intelligence. Even including closet indexers, about one-third of market ownership is effectively passive. That leaves a large, well-capitalized community of active participants whose job is price discovery. Price discovery has not been repealed. It has been supplemented by a low-cost ownership layer that, by the way, is overwhelmingly rational: only 21% of active funds beat their passive counterparts over the last decade.
People say concentration is dangerous. I say concentration in companies that are expanding margins, generating hundreds of billions in free cash flow, and posting double-digit earnings growth is the market doing its job. The Mag 7 collectively hold $597 billion in cash. Microsoft's cloud revenue hit $51.5 billion in a single quarter, up 26%. Alphabet's Google Cloud grew revenue 48% year over year in Q4. Meta's sales were up 24%. This is not speculative froth chasing eyeball counts and page views. This is revenue.
The comparison to 2000 is instructive precisely because it falls apart on inspection. In March 2000, the top seven names held 19% of the index. Today it is 28%, yes, but in 2000 the top names were Cisco, Intel, and companies trading at triple-digit P/E ratios on hopes of future profitability. Today's leaders have net margins that those companies never achieved. Nvidia's earnings were up over 70% year over year in Q4. Broadcom, now a top-ten holding, is printing money from AI networking. These companies earn more than the entire bottom half of the S&P 500.
What the Bears Keep Getting Wrong
The passive bubble thesis has a timing problem. Bank of America warned about passive "critical mass" in February 2025. The S&P 500 then went on to gain roughly 39% from its April 2025 low to its January 2026 high. Critics have been issuing this warning, in various forms, since passive crossed 30% market share, then 40%, then 50%. At each milestone the prediction was the same: things will break. At each milestone, earnings grew.
Carol Geremia of MFS, citing Jack Bogle himself, argues that passive has created ownership concentration and short-termism. I respect the concern. But the data shows the opposite of short-termism: passive investors are the most patient capital in the market. They do not sell on earnings misses. They do not rotate on macro headlines. They hold. That is not a systemic risk. That is a stabilizing force.
Yes, the Shiller CAPE near 40 looks expensive by historical standards. But the Shiller CAPE includes a decade of depressed post-financial-crisis earnings in its denominator. The forward P/E of 21.6 on expected 14.7% earnings growth gives you a PEG ratio around 1.5. That is not cheap, but it is not a bubble. It is a market pricing in a generational technology buildout that is, so far, delivering on its promises.
Could the Mag 7's massive capex spending become a problem? Potentially. Amazon plans $200 billion in capital expenditures for 2026. Meta guided $115 to $135 billion. These are real numbers with real risk. But the question I always ask is whether revenue is growing faster than the spend. For most of these companies, the answer remains yes. Microsoft's Azure grew 39%. Alphabet's cloud revenue growth accelerated from 28% to 48% over the course of 2025. That is investment, not speculation.
Bottom Line for Your Portfolio
Stay invested. The biggest risk for most investors is not concentration in mega-cap tech. It is being out of the market while these companies compound earnings at 15% to 27% annually. If passive indexing bothers you philosophically, supplement with an equal-weight allocation. But do not let a structural argument about market mechanics override five consecutive quarters of earnings evidence. Earnings don't lie. Narratives do.
