INSIGHTS

On November 02, 2026

AAM Viewpoints — Concentrated Concentration: When the Market's Biggest Bets Share the Same Risk

The U.S. equity market has become increasingly concentrated, with a handful of companies accounting for an unprecedented share of market capitalization. While the rise of these businesses reflects their extraordinary growth and profitability, it has also created an important vulnerability: investors have become increasingly dependent on a narrow group of companies — and a single investment theme — to sustain market returns. As the next earnings season approaches, this concentration could become a catalyst for a broader market rotation, creating opportunities for investors willing to look beyond the market's most crowded trades.

The magnitude of this concentration is particularly evident in the growth universe (see below). Over the past two decades, the weight of the S&P 500's 10 largest companies has more than doubled. Within the Russell 1000 Growth Index, the concentration is even more pronounced, with the three largest stocks alone representing approximately one-third of the index. While these companies have benefited from strong earnings growth and powerful competitive advantages, their increasing influence means that a reversal in their fortunes can have an outsized impact on the broader market.

Past performance is not indicative of future results.

More importantly, today's concentration extends beyond company size. The 10 largest companies in the S&P 500 are all increasingly dependent on artificial intelligence (AI) to sustain future growth. Whether through GPUs (Graphics Processing Units), custom chips, memory, networking, cloud infrastructure, AI-powered advertising, or enterprise software, these businesses are competing for — and investing heavily in — the same transformative opportunity. Although their business models differ, their future earnings expectations are increasingly tied to the successful adoption and monetization of AI.

The crowded pursuit of AI catalysts is creating growing concerns as companies compete for shrinking pools of capital to fund their planned expenditures. These investments may ultimately generate attractive returns, but the path to monetization remains uncertain and increasingly expensive. The largest investors in AI infrastructure are estimated to have negative cash flows next year (see below).  Declining cash flows, higher capital commitments, rising competition, and higher interest rates could challenge earnings growth, particularly if AI adoption or customer demand falls short of elevated expectations.

Past performance is not indicative of future results.

The upcoming earnings cycle could provide an important catalyst for a change in market leadership. Strong results from the largest AI-related companies could support further gains, but elevated expectations also leave little room for error. Unlike the low expectations of the previous three years, quarterly year-over-year forecast earnings growth has exceeded single digits in 2026 and is approaching 30% in the back half of the year (illustrated below).  With so much of the market dependent on the success of fewer companies, even modest disappointments could have significant consequences for index returns.  At the same time, companies outside the largest 10 (and outside the tech sector) may have an opportunity to attract investor attention as earnings become a more important driver of returns.

Past performance is not indicative of future results. | EPS = Earnings Per Share

This environment reinforces the importance of distinguishing between owning a great business and owning a great stock. The AI revolution will undoubtedly continue to create significant investment opportunities, but not every company investing in AI will generate attractive returns, and not every beneficiary needs to be an AI infrastructure provider. A broader opportunity set may emerge among businesses that can consistently grow earnings, maintain financial strength, and generate attractive returns on invested capital without relying on aggressive assumptions about future AI adoption.

As market concentration reaches historic levels, the opportunity for investors may lie not in simply following the largest stocks, but in identifying the businesses best positioned to deliver earnings growth in a variety of market environments. A broadening market could reward this discipline, while a more volatile environment may reinforce the benefits of a quality-focused approach. Ultimately, the next phase of the market may be less about how much investors own of the AI theme — and more about the quality, durability, and price of the businesses they own.

CRN: 2026-1002-13836 R

The opinions and views of this commentary are those of Sawgrass Asset Management and are not necessarily that of Advisors Asset Management.