For more than two decades, passive investing was sold as a humble idea: don't try to beat the market, just own it. Set it and forget it. It worked beautifully for millions of retail investors.

But according to a growing chorus of market critics, passive funds have become something far more consequential—they are the market.

The numbers are staggering. Data compiled by Apollo Global Management Chief Economist Torsten Slok shows that the three largest S&P 500 index funds now control more than $2.6 trillion in combined assets. Vanguard's flagship S&P 500 ETF (VOO) recently crossed the $1 trillion mark on its own.

That means an increasing share of investment decisions no longer belongs to analysts weighing earnings or debating valuations. Instead, capital flows mechanically through index-tracking vehicles that buy stocks simply because they are in an index.

"It's a systematic algorithm that operates off of the world's simplest algorithm: Did you give me cash? If so, then buy. Did you ask for cash? If so, then sell," said Mike Green, Chief Investment Strategist at Simplify Asset Management.

The Structural Limit of Price Discovery

The argument challenges a foundational assumption of modern finance. Traditional theory, popularized by Nobel laureate William F. Sharpe, treats passive investors as essentially non-participants in price discovery. Green says that description no longer fits reality.

Index funds constantly trade to accommodate daily inflows and outflows, as well as periodic index reconstitutions. As passive ownership expands, those transactions increasingly dictate market prices.

The result, Green argues, is a market that has become highly inelastic, where each new dollar entering index funds has an outsized effect on valuations. His estimate puts passive ownership at roughly 54% of the market today (growing at around 4% annually), but the more provocative part of his thesis is what comes next.

Green believes markets have an outer structural limit somewhere between 75% and 83% passive ownership. Beyond that point, he argues, volatility would break price discovery.

"If we get to that level of passive, effectively the market becomes so impossibly volatile that it becomes an inevitable event that it will eventually cause its closure," Green said.

A Bifurcated Market

Whether that prediction proves alarmist or prescient, there is little debate that passive flows increasingly favor the market's largest companies. Because index funds allocate capital according to market capitalization, the biggest stocks receive the biggest inflows regardless of whether their fundamentals are accelerating or slowing.

That dynamic has helped fuel extraordinary concentration in a handful of mega-cap technology companies, even as many active managers continue losing assets.

According to billionaire investor Bill Ackman, that distortion is increasingly visible.

"I think it is hard to make a statement on the overall market because it is really a bifurcated market," Ackman said in a recent interview. "We're finding a lot of really cheap stocks in a market that's hitting new highs."

He pointed out how investors' attention remains fixated on semiconductors, artificial intelligence infrastructure, and the next wave of highly anticipated IPOs. Meanwhile, companies that would once have been considered growth darlings have become oddly unfashionable.

"Meta Platforms, Inc. (META) is an old-fashioned company today, Microsoft Corporation (MSFT) is an old-fashioned company today," Ackman said. "Therefore, they're less interesting, and the result is that those stocks are cheap."

Ironically, passive investing removed emotion from investing. But when trillions of dollars flow automatically into the largest stocks, momentum can begin to masquerade as value.

For now, the machine continues to work. Every paycheck contribution, every retirement allocation, and every ETF inflow adds another brick to the structure.

But if capital continues chasing index weight rather than corporate value, the biggest risk may not be an incoming crash but rather a market that gradually forgets how to price anything at all.