Passive investing fueled a bull market — and could bring it down

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Passive investing fueled a bull market — and could bring it down

Passive investing fueled a bull market — and could bring it down

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Mark Dent

Published:

November 07, 2025

The growth of passive investing, through index funds found in the 401(k) accounts of average Americans, has propped up the stock market while also potentially setting it up for a nasty fall.

The stock market just keeps going up. In late October, the S&P 500 reached a record high for the eighth time this year. That came after it reached 13 record highs in 2024 and set multiple records in the 2010s.

Although stocks experienced a tough first week of November, they’ve generally risen this year despite:

A listless job market.

Tariffs that have squeezed small businesses and farmers, without leading to an intended increase in manufacturing jobs.

Inflation that has eroded consumer confidence and curtailed spending among lower-income Americans.

The longest federal government shutdown in US history.

The Hustle

Not everything is glum, of course. AI growth (powered by Nvidia), solid corporate earnings reports, trade deals, and interest rate cuts by the Fed have all provided reasons for optimism.

But there’s also a scary possibility for why the stock market has done so well for so long: You might be propping it up.

Yes, you. The person who doesn’t pay any attention to the stock market. The person who heard you should just put money in an index fund or ETF, or who just contributes 15% of your paycheck into a 401(k) fund that you know nothing about but is, in fact, a target date fund filled with products managed by Vanguard, BlackRock, or State Street.

If that sounds like you, you are — like a huge number of Americans — engaged in something called passive investing .

The Hustle

As of last year, ~53% of all money invested in US equity funds was under passive investment, locked into index funds or similar investment vehicles commonly held in pensions or 401(k) accounts. That’s up from ~4% in 1993, enough to comprise nearly one-fifth of all money invested in the stock market.

Some experts believe the total number of assets tied up in passive funds could be 2x higher because many active fund managers have started replicating passive fund strategies.

Passive strategies are preferred by 71% of Americans, according to Gallup, and are almost universally recommended. Warren Buffett, one of the world’s great stock pickers, has even said index funds are the best choice for average Americans.

As passive investing has grown, so has the overall market, which has continued a bull run that started back in October 2022 and has faced few setbacks since 2010. Several academics and notable investors have credited the rise of passive investing with helping stabilize and inflate the stock market.

The only problem: The same passive characteristics fueling the boom could lead to a nastier fall.

The rise of passive investing

In 1975, banker John Bogle founded an investment product that would change the world. Bogle introduced the first index fund for everyday investors, a precursor to the Vanguard 500.

At first, insiders critiqued the fund as “Bogle’s folly.” A copycat index fund didn’t arrive until nine years later.

Eventually, though, passive funds took off. (And Bogle became a legend in the investing world; a “Bogleheads” subreddit has 750k members.) Their use accelerated among people who sought stability after the Great Financial Crisis of 2008.

The Hustle

The key difference between active and passive investing is:

Active investment managers select stocks based on fundamentals — anything from its CEO to its price-to-earnings ratio.

Passive investment managers select stocks proportionally, based on their valuation within a group of stocks.

For example, the Vanguard 500 attempts to replicate the S&P 500, a weighted index of the largest 500 stocks by market cap, by selecting stocks based on their prominence within that index. As of late October, Meta ranked as the 5th largest stock, comprising 3.2% of the S&P 500. So Meta made up ~3% of the Vanguard 500.

The passive investment fund sees the stock price, “and that’s it,” says Campbell Harvey , a Duke University finance professor who’s researched passive investing. “They don't care about the trend and earnings. They don't care if there's a new CEO. They don't care. It's just the price.”

Passive funds are attractive because, with their investment fees typically running ~80% lower than active funds, they’re viewed as a cheaper way to own a diverse...