Are We Too Concentrated on AI?

While AI enthusiasm is understandable, it’s also important to remember that trends tend to come and go in the stock market, and it’s impossible to know exactly when sentiment will shift. A diversified portfolio, with exposure to various industries and sectors, as well as international stocks and bonds, will spread investment risk. It will provide downside protection if any one sector falls out of favor and upside exposure if an underperforming area turns around and starts to outperform.  

A History Lesson 

As AI took off, it became clear that the country would need more data centers to train and run AI models. Data centers need to be built, they need electricity to run, and semiconductor chips to crunch data. Stocks related to utilities, construction equipment and semiconductors have all had a strong 2025. Shares of semiconductor company Nvidia led the pack, rising 1,483% since the bull market began in October 2022, because its chips are used to train and operate AI models.  

Despite its recent success, a portfolio that’s overly exposed to Nvidia, or technology stocks in general, could fall disproportionately if semis or technology fall out of favor. Nvidia may be today’s market darling but consider what happened during the 2000 technology bust. Intel, which was then the king of the semiconductor hill, watched its shares fall sharply and never return to their 2000 peak.  

In the immediate aftermath of the 2000 tech bubble, demand for semiconductors dropped sharply and in the ensuing years, Intel had some missteps that led it to fall off the cutting edge of semiconductor development. Another semiconductor company rose to lead the pack, Advanced Micro Devices. When AI came along, AMD fell behind because Nvidia had the chips everyone wanted. Looking ahead, Nvidia may face competition from chips produced by Google, Amazon, and AMD. Time will tell.  

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Looking For Diversification 

Investing in oil companies or healthcare companies may not be as exciting as buying the tech stocks discussed nightly on CNBC, but diversification pays off, particularly when long-term trends unexpectedly shift. Investors can diversify beyond the technology and communications services sectors by increasing their exposure to stocks in other sectors like Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Materials, Real Estate, and Utilities.  

While companies in these areas might not sell technology or AI models, they still stand to benefit from AI. Employees will use AI to become more efficient, just like they did when the Internet was introduced. AI should allow companies to grow more profitably and that should benefit stocks of all stripes.   

Investors can also diversify investment portfolios by buying the stocks of companies located overseas. Many European companies have much lower stock price multiples and higher dividends than their US counterparts. Bonds also provide diversification. They might not grow like stocks during bull markets, but when bear markets arrive, high-quality bonds often hold their value or appreciate.  

Once a portfolio is diversified, it’s important to rebalance it annually by selling some winning stocks and redeploying the proceeds into other areas. Doing so ensures that one sector or stock allocation never becomes too large.  

Ironically, the S&P 500 illustrates what happens when a portfolio isn’t rebalanced each year. The market-weighted index allows winning stocks to become an ever-larger part of the portfolio. For example, the Magnificent-7 stocks--Alphabet (Google’s parent) Amazon, Apple, Meta (Facebook’s parent), Microsoft, Nvidia, and Tesla--have appreciated so much that they now represent almost a third of the S&P 500’s market capitalization.  

As they’ve rallied in recent years, the Magnificent-7 stocks have dragged the S&P 500’s return up even though the index’s average stock hasn’t performed as well. This year the Magnificent-7 stocks have risen about 23%, the S&P 500 has climbed about 15%, and the equal-weighted S&P 500 has about 4-5%. The same will likely be true in reverse. If technology stocks run out of steam, the S&P 500’s other 497 stocks may outperform. While performance differs based on the time period and calculation method, these estimates reflect the general trend we’ve seen: a small group of companies meaningfully influencing the index’s overall return. 

The Magnificent-7’s blockbuster run also explains why a diversified investment portfolio may not outperform the technology-heavy S&P 500 index. But that doesn’t mean a well-thought-out diversified portfolio isn’t appropriate or performing well. Instead, it suggests that the S&P 500 might not be the proper benchmark given its concentration in technology and AI-related stocks.  

Investors should always strive to have a well-diversified portfolio. Our team at WHZ is here to help. Call us at (860) 928-2341 or schedule a complimentary discovery session now with our team. Together, we can create a strategy designed to give you Absolute Confidence. Unwavering Partnership. For Life.

Authored by WHZ Strategic Wealth Advisors Senior Partner & Chief Investment Officer Laurence Hale. AI may have been used in the research and initial drafting of this piece. Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved. 

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