Tech Concentration Risks Mirror Past Bubbles as AI Drives Market Narrowing

Market cycles are narrowing as technology and artificial intelligence (AI) emerge as dominant forces, reshaping equity indices and investor strategies. Over the past three years, the performance of the S&P 500 has become increasingly tied to a handful of large-cap technology companies, especially those involved in AI. This trend has been amplified by the market-cap weighting of most broad indices, which means that the success of a few large firms pulls the entire index higher. Between June 30, 2022, and June 30, 2025, the market-cap weighted S&P 500 (SPY) returned approximately 70.9%, while the equal-weight S&P 500 (EQL) returned 49.4%, highlighting the disparity in returns. As a result, investors have been heavily concentrated in a subset of roughly eight technology firms, all of which are now competing in the AI space, increasing the overall risk of the market.

This concentration has historical precedents. Similar patterns were observed during the 2000 tech bubble and the 2008 financial crisis, when specific sectors—such as software, financials, and energy—dominated index performance. Today, the dominance of tech and AI firms suggests a similar dynamic. This pattern can amplify market corrections, as seen in 2022 when the market-cap weighted S&P 500 fell 18.2%, while the equal-weight index dropped only 10.6% during the same period. The 2025 early-year correction also demonstrated the same effect, with the S&P 500 falling 15%, while an equal-weight sector basket dropped 10%. These examples illustrate how diversification can help reduce volatility and risk exposure during downturns.

The concentration of market leadership has also raised concerns among analysts about the sustainability of the current bull market. Tom Essaye, founder of Sevens Report Research, has warned that the AI-driven rally may be forming a bubble, given the elevated valuations and the historical context in which bubbles tend to form—toward the end of economic cycles. Essaye points to the performance of the PHLX Semiconductor Index (SOX), which underperformed the S&P 500 in the past 12 months, as a potential red flag. This divergence suggests that the AI narrative, while bullish for the broader market, may not be supported by the underlying fundamentals of key AI-related sectors. If the semiconductor index weakens further, it could signal a broader market correction.

Investors are now being encouraged to consider strategies that reduce reliance on the most dominant stocks. Equal weighting across sectors is one such approach, as it redistributes exposure and mitigates the impact of concentrated downturns. Trend-following strategies, which use moving average-based portfolio management rules, are also gaining traction as a method to systematically reduce risk during market breakdowns. These approaches aim to smooth the ride for investors by balancing participation in equity markets with a reduced bet on a handful of tech giants.

As the market continues to evolve, the balance between growth and risk management remains a key priority for investors. The current market dynamics highlight the importance of diversification, especially as macroeconomic uncertainties rise and valuations remain stretched. In a shifting environment where market leadership can change rapidly, a rules-based and diversified approach may prove essential in preserving capital and capturing upside potential.