Since the pandemic, markets have entered what increasingly looks like a new era — one that echoes the 1960s through 1990s more than the low-volatility, low-inflation decades that preceded it. Inflation is more volatile, the geopolitical landscape less stable, and supply shocks more frequent. That doesn’t necessarily make the investing backdrop worse. It makes it different, and likely more volatile.
The Concentration Problem
Corporate earnings have been a genuine bright spot, but the gains are dangerously narrow. The ten largest companies in the S&P 500 — just 2% of its constituents — now account for roughly 40% of the index’s total market capitalization. That means the fate of the broader U.S. market is increasingly tethered to a handful of mega-cap technology names.
The pattern repeats globally. The Information Technology sector makes up 31% of the MSCI All Country World Index by weight, yet is forecast to drive 55% of total projected 2026 earnings growth. Most of that growth traces back to a small cluster of stocks in the U.S., Japan, and emerging markets.
Adding to the unease: this earnings strength isn’t showing up in a typical early-cycle recovery, which is usually when growth expectations run this hot. The market is behaving as though it’s early in a cycle when the data suggests otherwise.
The AI Capex Engine
Behind the concentration is a single powerful driver: artificial intelligence infrastructure spending. The largest technology firms are on pace to spend over $750 billion in aggregate in 2026, and close to $1 trillion in 2027, according to Bloomberg. That capital has flowed into technology hardware, communications equipment, construction, and semiconductors — lifting earnings across a select set of AI-adjacent industries.
The scale of what’s riding on this trend is hard to overstate. The total value of the U.S. stock market has more than doubled over the past decade, surpassing $75 trillion — roughly two and a half times the size of the entire U.S. economy, itself a record ratio. AI-related stocks account for roughly half of this year’s rise in the S&P 500, and economic growth itself is increasingly leaning on AI infrastructure spending.
That dependency cuts both ways. Bank of America’s July global fund-manager survey identified an AI bubble bursting as the top risk to financial markets — and by extension, a growing risk to the real economy. As Apollo Global Management’s chief economist put it, the AI narrative is “the thing that has been holding everything up.”
The Dollar’s Near-Term Path
Elevated U.S. bond yields, a hawkish Federal Reserve, and resilient domestic growth are likely to keep the dollar supported in the near term. U.S. yields have risen faster than most other developed-market government bond yields, even as other central banks adopt their own hawkish tilts — and a resilient U.S. economy continues to attract capital. A firmer dollar tends to support U.S. equities and keep the bond market comparatively stable. Geopolitics remains the wildcard: continued tension around the Iran conflict would likely reinforce dollar strength, while any de-escalation could ease demand for it.
What This Means for Portfolios
Inflation volatility — not simply its level — is likely to remain a defining market force, complicating the Fed’s task and weakening the traditional stock-bond relationship many portfolios are built around.
We don’t see an imminent end to the AI-driven profit cycle; capex trends point to continued strength through next year. But hyper-concentration and elevated earnings expectations are real risks. In an environment like this, broad diversification — across regions, sectors, and themes — becomes less of a defensive afterthought and more of a core strategy. It allows investors to participate in the AI-driven growth wave while building resilience against the possibility that the story falters.
The old playbook — broad index gains carried by a handful of names, backstopped by a reliably dovish Fed — may not hold in this new regime. Flexibility and diversification are likely to matter more, not less, from here.