Has the S&P 500 become too dependent on a handful of stocks?

What if one of the world's safest investments, trusted by millions, is now at the centre of one of the market's biggest risks?

The Vanguard S&P 500 ETF, better known as VOO, has become the world's largest ETF, with more than US$1 trillion invested in it.

Retail investors love it because it's cheap, simple and gives them exposure to the US's largest companies.

But that doesn't make it safe, especially as the conditions that drove the market higher start to change.

The Federal Reserve has just raised interest rates for the first time since July 2023. Bond yields are pushing towards 5%, oil is trading near US$100 a barrel and borrowing money is becoming more expensive.

The AI boom has flourished on cheap money, enormous spending and expectations of extraordinary future growth.

But higher bond yields reduce the present value of future earnings, while more expensive credit raises the cost of funding the chips, data centres and energy infrastructure needed to keep the boom going.

Some of the biggest names in AI are calling for development to slow. Whether that leads to lower spending is still unclear, but spending doesn't need to collapse for these stocks to fall.

When expectations are already high, even slightly weaker growth can trigger a major reassessment. That's the real risk for VOO investors.

The fund may hold around 500 companies, but a small group of technology giants heavily influences its performance.

If the stocks that drove the index higher begin falling together, owning the entire index may offer far less protection than many investors expect.

After the Fed's rate hike in July 2023, the S&P 500 fell about 11% to its October low. A similar correction would make 7000 points a real possibility, but history tells us the downside can be much greater.

The S&P 500 lost roughly 40% to 50% during the 1973-74 oil crisis, the technology bust and the Global Financial Crisis.

If slowing AI investment becomes the catalyst for another major crash, history suggests the index could fall towards 4000 points.

That would be very painful for retail investors who have piled into ETFs near record highs, leaving them exposed to the entire decline.

While holding through a 50% fall sounds easy in theory, it rarely feels that way when your money is disappearing.

History shows that many investors eventually crack under the pressure and sell when the damage is already done.

However, holding on presents another challenge: how long can you afford to wait?

After peaking in 2000, the S&P 500 didn't break decisively above that level until 2013. Could you afford to wait another 13 years to get your money back?

The S&P 500 doesn't have to crash, but with money becoming more expensive, oil pushing costs higher and AI expectations stretched, blindly buying the index may not be the safe strategy many investors have been led to believe.

Best and worst sectors

Health Care was the best-performing sector this week, rising more than 4% as heavyweight CSL continued its recovery, supported by renewed investor confidence and positive broker sentiment.

Communication Services gained 0.81% as investors rotated into defensive stocks, supporting heavyweight Telstra.

Consumer Discretionary rounded out the top three, up 0.40%, as bargain hunting supported retailers following the market's recent sell-off.

At the other end of the market, Materials was the worst sector, falling more than 1.5% as weaker commodity prices and profit-taking weighed on major miners.

Information Technology was the second-worst sector, also dropping more than 1.5% as rising bond yields and renewed AI concerns pressured highly valued growth stocks.

Real Estate rounded out the worst performers this week, falling more than 0.5% as higher bond yields and expectations of further interest rate rises reduced the appeal of property stocks.

Best and worst stocks

Telix Pharmaceuticals led the ASX Top 100 this week, climbing more than 11% after receiving FDA approval for its brain cancer imaging product, Pixclara.

Dyno Nobel Ltd followed, rising 6.94% as its share buyback and improving explosives earnings outlook attracted buyers.

CSL Limited rounded out the leading performers, gaining 6.26% as broker upgrades strengthened confidence in its earnings outlook.

At the other end, Mineral Resources was the weakest performer, falling more than 8% as another decline in lithium prices weighed on producer sentiment.

IGO Limited followed, also falling more than 8% as falling lithium prices renewed concerns about its earnings outlook.

NEXTDC Limited rounded out the worst performers, falling 8.29% after announcing $1.1 billion in convertible note funding, raising concerns about dilution, debt and heavy spending.

All Ordinaries Index update

The All Ordinaries has finished flat so far this week, slipping just 0.1% as indecision continued to dominate.

The recent decline in oil prices may have eased some pressure, but the index remains caught between key levels.

Support sits around 8800, while 8600 becomes the next major level to watch if sellers regain control.

Healthcare helped offset further weakness in Materials, while Financials finished relatively flat.

Materials has now declined for three consecutive weeks and is approaching its longer-term uptrend, making next week particularly important.

Strong demand linked to renewable energy and electric vehicles could attract buyers, although uncertainty surrounding the AI investment cycle may create some headwinds.

For now, this remains a stock-picker's market rather than one that favours passive investors.

If the All Ordinaries holds above 8600, the broader market can still be viewed as moving sideways.

However, a decisive break below that level could bring 8000 into focus and potentially trigger the deepest correction since the tariff-driven sell-off in April last year.

Markets can change quickly, so investors need to stay informed and watch how prices respond around these critical support levels.

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