Big Tech’s market dominance is becoming ever more extreme
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US stocks rose to their 36th record high of the year on Tuesday afternoon, but portfolio manager Jacob Sonnenberg was in no mood to celebrate.
Propelled by a handful of huge Silicon Valley technology companies tied to the artificial intelligence boom, the S&P 500 ended the session in the green. But this was despite the fact that 397 stocks lost ground.
In 35 years, the blue-chip index has never posted a gain on a day when so many of its constituents have sold off, according to the Bespoke Investment Group.
“I understand Nvidia is spitting out cash, I get it. But it’s still deeply concerning how concentrated this market is becoming,” says Sonnenburg, who focuses on tech stocks for California investment group Irving Investors. “If you’re not in one of about 10 names, it’d be insanely challenging to make money.”
In a week when Nvidia became the world’s first $5tn company, the dominance of a handful of big tech companies is becoming even more pronounced.
Eight of the 10 biggest stocks in the S&P 500 are tech stocks. Those eight companies account for 36 per cent of the entire US market’s value, 60 per cent of the gains in the index since the market bottomed in April and almost 80 per cent of the S&P 500’s net income growth in the last year.
According to Nomura analysts, the S&P 500’s roughly 2.4 per cent rally in the five sessions up to and including Wednesday was almost entirely driven by just three stocks — Alphabet, Broadcom and Nvidia.
“In the US we’re clearly in a momentum-driven market being led by a handful of technology companies trading at transparently dubious valuations,” says Steven Grey, chief investment officer at Grey Value Management.
With the S&P 500 up about 16 per cent this year, “investors who simply closed their eyes and went along for the ride have done well”, he adds.
A retail investor might think that putting funds into the MSCI All World index would give them a diverse portfolio. But that index, which comprises over 2,000 companies from more than 40 markets, currently has almost a quarter of its capitalisation in just eight US tech groups.
Tech dominance is far from a new phenomenon: groups including Apple, Microsoft and Meta have driven US markets higher ever since the great financial crisis more than 15 years ago. Markets around the world also tend to be top-heavy, dominated by a small number of companies that generate the majority of shareholder returns.
In the US, stock market concentration is a natural byproduct of the small number of companies responsible for the bulk of earnings growth and capital expenditure.
Google, Amazon, Meta and Microsoft, for example, plan to spend more than $400bn on data centres in 2026, on top of more than $350bn this year.
In October, the IMF’s chief economist said the AI investment boom, already one of the biggest movements of capital in modern history, has helped the US avoid a sharp slowdown.
Lingering concerns about overcapacity and when the investment spree might deliver meaningful returns came to a head on Thursday, however, after Alphabet, Meta and Microsoft published their latest quarterly results.
While Alphabet’s shares rose 3 per cent on the Google parent boosting its capital expenditure plans for 2025 by $8bn to $93bn, Meta dropped 12 per cent as Mark Zuckerberg’s company said AI spending would eclipse $100bn next year.
Heavy investment in AI infrastructure is expected to slow earnings momentum at leading tech groups. Meta’s earnings are forecast to grow by an average of just 1 per cent in each of the next four quarters, having risen by an average of 37 per cent in the preceding four, according to S&P Capital IQ data.
Microsoft — which surpassed a $4tn valuation this week after finalising a restructuring pact with ChatGPT creator OpenAI — slipped 3 per cent after it reported a 74 per cent year-on-year spending increase.
“Concentration has benefited a lot of people. The average American holding a capitalisation-weighted index has made money, and a lot of it,” says Kathryn Kaminski, chief research strategist at investment group AlphaSimplex.
“At the same time, if one of the giants falls or they all do, they could take the whole market with them.”
The new phase of market concentration began with the launch of ChatGPT in November 2022.
Since then, investors’ fervour for software that can generate humanlike responses to questions, draft poems and generate images on demand has powered a 165 per cent rally for a basket of stocks linked to AI.
The S&P 500 has climbed about 70 per cent over the same period while companies that do not leverage AI as a core part of their business rose just 25 per cent.
Between 2023 and 2024, the so-called Magnificent Seven of Apple, Microsoft, Meta, Amazon, Alphabet, Nvidia and Tesla were responsible for the vast majority of the broader market’s gains, with smaller AI-adjacent companies posting more modest returns.
That trend has reversed so far this year, however.
AI stocks beyond the Magnificent Seven including energy groups GE Vernova and Vistra and software groups such as Palantir — which boasts the highest valuation relative to its profits of any S&P 500 company — and Oracle are now outperforming their larger rivals as investors rotate away from the biggest names. Non-AI stocks have continued to lag behind.
“I’m interested in cheaper tech companies that can still pop on AI, and a few that we own like [data storage group] Seagate and [semiconductor testing group] Teradyne did so on Wednesday,” says Que Nguyen, head of cross-sectional equity research and strategy at Research Affiliates.
She challenges the idea that AI alone is driving the US stock market higher. “If you had seven Nvidia’s dominating the market and economy, that would be crazy,” she says.
“But Amazon sells cloud computing and also sells cereal. Apple has hardware and software. Meta and Alphabet are in communications. They’re not just AI companies. The theme tying them all together is that they are seen as being leaders in harnessing new technology for the benefit of their businesses.”
Framing top-heavy markets as inherently risky also ignores how investors have gravitated to “big, stable, diversified companies”, Nguyen adds. “Greater concentration is actually associated with lower risk.”
A recent study titled “The Fallacy of Concentration” by Windham Capital Management chief executive Mark Kritzman and State Street Associates’ David Turkington supports her claim.
To establish whether top-heavy stock markets make for a riskier investment, the authors tested what they describe as a “dynamic trading rule” which cut their exposure to stocks as market concentration rose and increased stock exposure as the S&P 500 became more evenly balanced.
Kritzman and Turkington concluded that a buy-and-hold strategy “generated more than twice as much wealth as the dynamic strategy . . . and it did so with less risk”.
On Wall Street, AI optimism is ubiquitous. A noteworthy feature of the AI rally is the extent to which hefty corporate valuations hinge on the biggest stocks steadily generating unprecedented amounts of cash long into the future, despite the likelihood that competitors eventually spring up to chip away at their market share.
“There’s a world in which these top companies continue to dominate for years,” says Kaminski.
Indeed, some investors seem to have discounted the notion that AI might prove anything less than earth-shatteringly revolutionary, according to Qian Wang, an economist at Vanguard.
“The market often gets ahead of itself,” she says. “When valuations are stretched with high hopes for the future, downside risk often outweighs upside potential.”
US stocks are trading at extreme levels by almost every measure, with AI companies almost entirely to blame.
The S&P 500’s cyclically adjusted price-to-earnings ratio — which compares share prices to an average of inflation-adjusted earnings over a 10-year period — is at its highest level in 25 years. The market’s price-to-sales ratio — how much investors are willing to pay for each dollar of a company’s revenue — is above levels hit during the dotcom bubble of 1999.
Since 1970, the total value of all publicly traded US stocks has averaged about 85 per cent of US GDP. Warren Buffett once described this as “probably the single best measure of where valuations stand at any given moment”. On Tuesday, the metric rose to a record 225 per cent.
Some market watchers attribute the tech sector’s relentless rally to indiscriminate retail investors gripped by a fear of missing out, though institutional investors are often just as guilty.
“If you ignore the investor sentiment factor, our models are screaming sell,” says Jason Hsu, founder and chair of Rayliant Global Advisors, which holds about 150 US stocks in its portfolio.
Most traders dismiss talk of a dangerous AI investment bubble as premature, contending that unlike during the dotcom era, today’s stock market darlings have robust balance sheets underpinning their vast spending programmes.
Federal Reserve chair Jay Powell leapt to the bulls’ defence this week shortly after the US central bank lowered interest rates for the second time this year. “The companies that are so highly valued [today] actually have earnings,” Powell said on Wednesday.
Sceptics immediately pointed to several dotcom-era companies whose shares plunged at the turn of the millennium despite their strong financials.
“Cisco Systems had earnings and a business model in 1999. Its shares subsequently declined 90 per cent,” says Mike O’Rourke at Jones Trading. “A popular product does not guarantee a good business. Yahoo and AOL were popular, too.”
In a note to clients last month, Barclays analysts distinguished between the highly leveraged telecom operators that tumbled after leading an infrastructure build-out 25 years ago and the AI companies funding their own spending today.
But the distinction is already beginning to break down. On Thursday, the Financial Times reported that Meta plans to raise $25bn from a bond sale to help pay for soaring AI costs. Oracle sold $18bn of bonds in September to help pay for the development of data centres it has leased to provide computing power to OpenAI.
“The easy, feel-good phase where the AI build-out was all self-funded is coming to end,” says Nomura strategist Charlie McElligott, who added that AI “euphoria” could quickly turn to “scepticism” if big tech companies were to tap debt markets too aggressively.
For now, however, “people aren’t worried about downside risk, they’re worried about missing the rally”.
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