Equities have remained resilient, supported by solid earnings growth and a macro backdrop that remains healthy. But the structure of the market warrants notice. Global indices such as MSCI ACWI have become heavily concentrated in a small number of companies, leaving portfolios more exposed to positioning risk, particularly when the next phase of the cycle is likely to introduce new competition for capital. Potentially large-scale IPOs in AI and adjacent sectors could spark further gains and optimism in the megacap tech space in the near term, but could later lead to volatility as the market needs to fund the new issuance.
High concentration and rising equity supply do not undermine the case for equities. Earnings remain supportive, and we continue to expect market indices to move higher over the medium term. But it does change how returns are likely to be generated. We think the next phase for market gains is likely to be characterized by a broadening of leadership beyond the megacaps, increased rotation within equities, and more frequent episodes of volatility as capital is reallocated. Against this backdrop, the key question is how to reduce portfolio concentration without stepping away from the underlying drivers of the cycle.
We recommend three actions:
Dilute index concentration. Investors with core exposure to global equity benchmarks should consider complementing these holdings with allocations that reduce reliance on the largest index constituents. This can be achieved by incorporating equal-weight index approaches, or by adding exposure to our preferred markets for diversification which include Japan, emerging markets, China, China’s tech sector, global health care, Switzerland, and European consumer discretionary.
Broaden exposure across the AI value chain. While megacap growth stocks remain central to earnings delivery, the impact of AI is expanding into other sectors, including infrastructure, power, and industrial supply chains. So, investors can consider broadening concentrated exposure in megacaps into these areas, which are likely to see increasing earnings support as capital expenditure related to AI continues. Preferred areas include global industrials, power and resources, enablers (semiconductors, infrastructure), and global beneficiaries in Asia and Europe.
Use megacap rallies to rebalance into structured investments and multifactor strategies. We should expect continued optimism about AI to drive periodic rallies in megacap tech. Investors can use these as an opportunity to rebalance, including by replacing a portion of their holdings with structured investments that offer more defensive exposure, or with multifactor strategies that can help diversify portfolios from overexposure to megacap tech stocks.
