Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 677

Four charts that expose market concentration risk

Since ChatGPT launched in 2022, some AI-related stocks have soared to record highs despite elevated inflation, sweeping tariffs and war in the Middle East. A small group of companies now make up an outsized share of the US market, pushing concentration to levels not seen in decades.

That means investors in some index funds may be holding unintended risks in their portfolios, since market capitalisation-weighted funds, which weight companies based on their market value, are not as broadly diversified as many expect.

1. Today’s market is among the most concentrated in history

It is undeniable that we are living through an extraordinary market environment. Today’s market concentration stands out, with the top 10 companies approaching 40% of the S&P 500 Index.

However, we have seen this before. Similar levels of concentration emerged in Japan’s 1980s boom and the US Nifty Fifty era. Specifically, in 1964, the top 10 stocks reached 39% of the S&P 500 Index. The largest holdings included AT&T, General Motors, ExxonMobil, IBM and Texaco — diverse businesses from a range of sectors.

Markets have long rallied around compelling investment themes

Today’s concentration differs from the 1960s because many of the largest companies, including NVIDIA, Microsoft, Amazon and Micron Technology, are tied to a single theme: AI investment. As a result, semiconductor stocks, for example, could decline in tandem if demand for chips drops.

This is precisely what we saw during the early July pullbacks in the market, which were led by companies such as SK Hynix and Sandisk.

Prior episodes of intense concentration eventually broke down, often painfully, before returning to more balanced levels. That does not mean a market crash is imminent, nor are we predicting one. Concentration is not a timing tool, but it is a reminder that trees don’t grow to the sky.

As investors crowd into AI-related stocks, some high-quality businesses have been left behind. These are companies with growing profits, strong dividends and durable franchises. Many are trading at discounts to their historical valuations of 20% or more. Examples include Royal Caribbean, Procter & Gamble and Citigroup.

2. AI concentration is a global phenomenon

Market concentration is not limited to the US. The seemingly insatiable demand for specialised chips has catapulted technology companies in South Korea and Taiwan to new highs. The top 10 firms in the MSCI Emerging Markets Index account for 41% of its total market capitalisation, with just three — SK hynix, Samsung Electronics and TSMC — making up 29%.

Worldwide demand for computer chips has fueled market concentration

Meanwhile, global markets continue to offer other attractive opportunities, particularly in Europe and parts of Asia, where valuations remain compelling. Such examples include UK-based drug giant AstraZeneca and China-based Tencent, the largest gaming company in the world.

Similarly, there may be opportunities to be found by sifting through the artificial intelligence wreckage for companies that may have been unfairly hit by fears that easy-to-use AI applications will impair their business. These include large software companies like Germany’s SAP, as well as companies in the online travel space, including China’s Trip.com and Spain’s Amadeus IT Group.

3. US GDP heavily relies on AI spending

Concentration risk extends beyond the top 10 stocks in the US index to the broader economy. The data centre build-out has supported US growth, with AI-related investments contributing nearly 1% to real GDP in the first nine months of 2025, or 39% of overall growth during that period, according to the St. Louis Federal Reserve.

Thus, company earnings and the broader economy may be more vulnerable to an AI-induced slowdown. The growing profit pools are all driven by the same physical build-out of data centres. Chipmakers have grown the most because roughly 50% of data centre-related costs are tied to semiconductors, but companies that provide heating and air conditioning, electricity, water treatment and transformers are also enjoying strong tailwinds.

AI drives large parts of the global economy

Arguably, the next chapter of the story may be about beneficiaries outside of the capex boom. These include companies that can use AI to gain a competitive advantage they haven’t had historically. Within industries such as financials and healthcare, certain companies will use AI in ways that will help them grow faster or become more profitable relative to competitors.

4. AI fatigue is hitting the bond market

Another corner of the AI boom showing signs of strain is the US corporate bond market. The tsunami of bond deals has weighed on the debt prices of high-profile companies including Meta, Amazon and SpaceX.

Today, hyperscalers including Alphabet and Meta account for roughly 4.8% of the Bloomberg US Investment Grade Corporate Bond Index, an increase of 78% from a year earlier.

AI-related companies have flooded debt markets

The sheer volume of deals tied to AI underscores the importance of diversification in fixed income, particularly because bond prices tend to have more downside risk than upside potential. Evaluating opportunities one by one is critical. Some hyperscalers offer attractive yields relative to their strong cash flows and credit ratings, but being more selective when it comes to certain newer project financing structures is important.

Despite the surge in issuance, we remain constructive on the broader credit market.

Strong corporate earnings, healthy consumer spending and a resilient labour market provide a supportive backdrop for credit. We don’t believe AI-related borrowing will derail that picture, but it reinforces the value of maintaining exposure across investment-grade and high-yield corporate bonds, securitised credit and emerging markets.

A call to rebalance and diversify

The market concentration in AI reveals some of the trade-offs tied to investing in index funds. There is a common misperception that index funds somehow are safer for most investors. Passive funds are cheaper on average. But cheaper is not the same as safer, nor does cheaper necessarily equate to better investor outcomes.

This is not an argument against owning the companies driving the artificial intelligence era. Many are extraordinary businesses with durable prospects. The point is, at today’s weights and valuations, the benchmarks — and the passive strategies following them — increasingly assume one set of outcomes will dominate.

A more balanced approach calls for investors to review their risks, both intended and unintended. Arguably, the winners of this current period will need to be both bold and humble. Bold enough to own great companies when the fundamentals justify it. Humble enough to recognise that no single theme, however powerful, should dictate the shape of portfolios. Bold enough to differ from the benchmark when risk and reward call for it. Humble enough to know that being different can be uncomfortable but necessary, especially when a narrow market continues to rise.

 

Matt Reynolds is an Investment Director for Capital Group Australia, a sponsor of Firstlinks. Statements attributed to an individual represent the opinions of that individual as of the date published and may not necessarily reflect the view of Capital Group or its affiliates. This article contains general information only and does not consider the circumstances of any investor. Please seek financial advice before acting on any investment as market circumstances can change.

This content is issued by Capital Group Investment Management Limited (ACN 164 174 501 AFSL No. 443 118), a member of Capital Group.

© 2026 Capital Group. All rights reserved.

For more articles and papers from Capital Group, click here.

 

  •   26 August 2026
  • 1
  •      
  •   
1 Comments
 

Leave a Comment:

RELATED ARTICLES

Global market growth hinges on Iran War and AI rollout

Three strategies for investing amid AI whiplash

New avenues of growth make 2025 exciting for investors

banner

Most viewed in recent weeks

Why spending more in early retirement can improve lifetime income

Conventional wisdom encourages retirees to preserve superannuation. But if those likely to qualify for the Age Pension later in life spend a little more today, it may deliver higher lifetime income and a more stable retirement.

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

The new capital gains tax trap for your portfolio

Investors have long accepted one portfolio rule without much question. A major tax shift could change that calculation entirely, forcing difficult trade-offs between risk, discipline and an overlooked cost lurking beneath.

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

Latest Updates

Fixed interest

Higher yields are creating opportunities in global bonds

Bond markets are adjusting to a new reality, but not in the ways investors expect. With markets repricing and capital competing for attention, investors may need to rethink where resilience and opportunity lie. 

Economy

Are we in a recession?

What if the warning signs are already everywhere? From supermarket aisles to company failures, investors are being bombarded with recession signals. But most face a different risk that can be just as dangerous for portfolios. 

SMSF strategies

Meg on SMSFs - Division 296 actuarial certificates

The tax bill might be yours, but the event that caused it may not be. A key Division 296 calculation can sometimes attribute earnings in ways that many SMSF trustees won't instinctively expect or fully appreciate.

Property

The first impact of negative gearing reform is not the tax bill

Negative gearing changes formally begin in 2027, but the first consequences may already be here. A subtle shift is quietly influencing who can borrow, how much they can access and which property strategies still stack up.

Economy

The oil market is running out of easy answers

The biggest threat to markets may not be what investors are watching. The numbers have stopped adding up and supply is harder to measure, with forecasts becoming simple guesses. A more fragile reality is being masked.

Investment strategies

The state of investor knowledge in Australia

Australians are investing more than ever, yet a surprising divide is emerging between those building wealth effectively and those making costly mistakes. Surprisingly, the gap has little to do with income, age or starting capital.

Taxation

Complexity and capital gains

A case study shows that the ‘30% minimum CGT’ is a poorly conceived tax that adds significant complexity to an already over-complex system. A less complicated model would create a much fairer progressive tax scale.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.