Diversifying Equity Portfolios Beyond AI

The rapid development of artificial intelligence (AI) influences global financial like markets unlike any other mega trend these days. AI drives innovation, investments, and expectations, accelerating not only stock prices of technology giants, but increasingly earnings expectations for the broad equity markets. Many companies are fueled by expectations that AI will improve their productivity, margins, and long-term growth opportunities.

AI sparks historic investment wave

Investments in AI infrastructure represent one of the largest capi-tal expenditure waves in recent history, driven by the soaring need for computing power, specialized chips, extensive data centers, and high-speed networks. Tech giants are committing billions to build AI-optimized facilities, while governments are pushing the expansion of digital infrastructure. In the US, spending on data centers now rivals that on office buildings, underlining the struc-tural scale of this transformation.

Since ChatGPT’s debut in 2022, Nvidia has become the symbol of this boom, but other companies across the AI value chain have also strengthened their market positions and rewarded shareholders generously.

New bubble or sustainable trend?

The rapid ascent of AI has electrified financial markets over the past three years. This boom is considered one of the main drivers behind the recent stock market rally—not just in the technology sector. The enthusiasm surrounding generative AI, machine learning, and cloud-based computing power has inspired investors worldwide and has significantly elevated both company valuations and broader equity markets. This inevitably raises the question of whether current price levels are still justified by fundamentals or whether we are once again in the midst of a speculative bubble similar to the dot-com era at the turn of the millennium.

Certain parallels are indeed hard to deny: excitement over a groundbreaking technology, significant price gains within a short period, and a growing belief that a structural shift could redefine entire industries. However, there are crucial differences suggesting that the AI boom rests on a much sounder foundation. Today’s dominant players—the so-called “Magnificent 7” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla)—are, in contrast to many of the unprofitable internet start-ups of 1999, highly profitable, established, and well-capitalized. They possess proven business models, strong cash flows, and in some cases, commanding positions within their respective sectors.

While many technology stocks traded at price-to-earnings (P/E) multiples of 70 or even 100 in 1999, today’s market leaders typically have multiples in the range of 25 to 35. This means current valuations certainly reflect high expectations, but they are underpinned by real profits and cash flows.

Ultimately, the nature of the underlying innovation also differs. Today’s AI wave is not merely speculative; it’s grounded in a tangible technological revolution. Data centers, semiconductors, cloud infrastructures, and AI software collectively form an ecosystem of real economic value with substantial investment volumes. The current boom is thus not just a capital markets phenomenon but a reflection of a profound technological paradigm shift, with the potential for application across all industries—from healthcare and manufacturing to financial services.

Hidden concentration risks

However, the risks should not be underestimated. The significant market concentration of the “Magnificent 7” presents cluster risks: these companies now account for approximately 35% of the total market capitalization of the S&P 500 Index and over 22% of the global equity benchmark MSCI All Country World Index. Disappointments from any one of these heavyweights could put significant pressure on the overall market. Many portfolios that appear broadly diversified by investing along established equity indices are, in reality, heavily exposed to just a handful of growth drivers. This is because standard indices, which are weighted by market capitalization, are now largely dominated by AI-related mega-caps. For investors, this means that regularly reviewing one’s portfolio structure remains essential—not out of skepticism towards AI, but to ensure a balanced and resilient portfolio.

Paths to broader diversification

Although the US market continues to be seen as a global growth engine, there are strong arguments for placing greater emphasis on a value-oriented investment approach. For growth-oriented investors, this could be an opportunity to reduce exposure to the AI sector while evaluating alternative options, without exiting the equity market entirely.

Strategies such as equal-weighted approaches within the S&P 500 Index, strategies focusing on less volatile stocks, or international diversification—such as investing in emerging market equities—are all ways to achieve broader portfolio diversification and reduce dependencies on a few market leaders.

Conclusion

AI undoubtedly remains a dominant driver of the markets. However, focusing exclusively on the major technology stocks means missing out on important sources of stability. A well-considered diversification strategy ensures that portfolios not only participate in the AI revolution but are also broadly diversified and resilient over the long term.