As mega-cap technology stocks continue to grind higher, investment managers have been warning that this growing concentration poses a risk to equity markets.
The biggest perceived beneficiaries of artificial intelligence (AI) now make up eight of the top-10 largest firms in the S&P 500 index, and these same firms account for one third of the value of the entire index.
But a closer examination of artificial intelligence and its implications suggests this equity market concentration is warranted, according to BlackRock, the world’s largest asset manager.
“Current market concentration need not be a concern,” said strategists at the BlackRock Investment Institute. “Equity market concentration today reflects a ‘winner-takes-all’ feature of AI, we think.”
“If market concentration is driven by underlying transformation, it does not need to imply market fragility, in our view.”
Fears around market concentration “may be overdone”, argue BlackRock’s strategists. “For major players like advanced chip manufacturers, dominating the AI race may be a matter of survival,” they explained.
“Nvidia, for example, controls the high-tech chips powering data centers and has illustrated the ‘winner– takes-all’ dynamic over the last two years. This explains current concentration of market power – it’s a feature, not a flaw.”
They argue that AI is an economic transformation that is “reshaping markets” and that the index concentration is part of this broader shift.
“We also find that heightened concentration often precedes more dispersion, not necessarily broad underperformance,” they added.
Mega-cap tech stocks to remain dominant
Although chipmakers such as Nvidia are direct beneficiaries of the race to build out AI, BlackRock noted that some of the industry’s biggest spenders stand to benefit.
“Mega-cap technology firms remain key beneficiaries of the buildout phase, even if some of them may ultimately lose the race to others,” they said.
“In aggregate, we believe their unmatched resources — data, talent, computational capabilities, strong balance sheets — and technological expertise enable them to innovate faster and maintain a competitive edge.”
“This has led to market concentration for a reason, as network effects and high barriers to entry reinforce their dominance.”
However the strategists also suggested the future winners could emerge from unexpected areas.
“It may not be the sectors adopting AI that ultimately capture the value,” they said. “For example, while the agricultural sector benefited from the industrial revolution, its economic weight declined over time.”
“Similarly, AI-driven productivity gains in certain sectors may not necessarily result in those same sectors capturing a proportional share of the economic value.”
This is why the asset manager stressed the importance of an active investment approach, since technological knowledge may be required to identify the potential AI winners.
However, some risks to this continued so-called “AI trade” could be disappointing AI adoption, power or supply issues and regulatory pressure.
“Concentrated profits in new technologies have historically triggered antitrust scrutiny, as seen with railroads and telecommunications,” the strategists warned.
The strategists also flagged that geopolitics and global trade competition is also likely to shape how governments regulate AI.
Indeed, the European Union recently published the AI Act in July of this year, marking the first major comprehensive regulatory framework for AI.
