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Broadening Gains, Narrowing Diversification: The AI Concentration Question
For the week ended August 14th, U.S. equities were broadly higher, led by small caps: the Russell 2000 gained 1.15%, the S&P 500 added 0.39% to close at 7,786, and the Nasdaq rose 0.16% to 26,729. The Dow Jones Industrial Average was the lone decliner among major indices, slipping 0.53% to 53,732.
Energy Leads, Tech Lags
Sector performance was uneven: Energy was by far the strongest sector for the week, up 7.3%, extending its lead as the top performer year-to-date at 39.9%. Technology was the weakest major sector for the week, down 0.8%, though it remains up 24.3% year-to-date, while Consumer Discretionary lagged most for the week, down 1.9%.
Inflation Holds Steady
On inflation, headline CPI rose 3.4% year-over-year, and core CPI rose 2.5% year-over-year, while producer prices (PPI) were flat on a month-over-month basis. Treasury yields moved modestly higher on the week, with the 10-year finishing at 4.68% (versus 4.65% the prior week) and the 30-year at 5.25%. The broad U.S. Aggregate bond index slipped 0.14% for the week as yields backed up.
AI Concentration Grows
J.P. Morgan’s research this week highlighted the growing concentration of AI-related exposure across both public and private markets. Hyperscalers have tapped nearly every corner of the capital markets to fund the AI buildout, which J.P. Morgan Global Research estimates could reach a cumulative $5.5 trillion by 2030, pushing technology’s share of total value to 47% of the S&P 500 and even higher in private markets, including 41% of private credit and 57% of venture capital. J.P. Morgan notes that international developed equities, where technology is only about 15% of the benchmark, and real assets within private markets remain among the more underappreciated ways to limit concentration in a single theme.
Midterms and Markets
With the November midterm election now less than three months away, it is a good time to revisit how these cycles have historically affected markets. Since 1933, midterm election years have posted the lowest average S&P 500 return of any year type, but that average has still been solidly positive.
Looking Ahead
Looking ahead, the coming week brings housing starts data and the release of the FOMC’s latest meeting minutes, both of which should offer further clarity on the path for growth and policy into year end.
As Always
I’d like to leave you with the final line we’ve used since we started these commentaries back at the very height of market volatility in March 2020. Always remember that we create financial/investment plans not for the easy times, but to prepare for the tough ones.
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