Commentary: How much AI Is too much for stock investors?
While it’s tempting to keep riding the wave, investors would be wise to diversify their portfolios, says Jonathan Levin for Bloomberg Opinion.
A screen displays trading of the S&P 500 Index at the New York Stock Exchange (NYSE) in New York City, Jan 2, 2026. REUTERS/Jeenah Moon
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MIAMI: The latest earnings season is drawing to a close, and it’s revealed how the artificial intelligence boom is engulfing more and more of the S&P 500 Index. The profits are pouring in, yet the US is increasingly a single-narrative market – one where stocks will swoon together when the music stops playing.
The overwhelming majority of sectors is growing swiftly, thanks not only to the fortunes of advanced chip designers and hyperscalers but also less sexy memory companies including Sandisk, which went from a US$5 billion capitalisation last year to one of the world’s 100 most valuable firms.
Then, there are the real estate, industrials and materials companies doing the hard work of erecting new town-sized data centres. And don’t forget the bankers, making great money executing all these deals. (The forthcoming crop of AI mega-IPOs sure won’t hurt.)
The stock market and large parts of the real economy have, in essence, hitched their wagons to a single thematic that can turn on a dime. Investors who have owned the S&P 500 for a long time may be surprised by the size of their AI exposure.
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While it’s tempting to keep riding the wave, they’d be wise to try to restore a semblance of diversification to their portfolios. For some, that may mean rebalancing by selling shares of a few winners. Others may look to uncorrelated sectors including energy or even adding to Treasury holdings: They won’t offer quite the same upside, but they will cushion the fall if the bottom drops out.
One way to think about this is simply in terms of direct exposure. Constituents of Bloomberg Intelligence’s AI theme basket now make up around 45 per cent of the S&P 500 Index by weighting. If you add in companies tied to compute infrastructure and the AI power theme, you’re up to around 53 per cent of the index.
The only sector groups without large, direct exposure to the AI trade at the moment are energy, healthcare, consumer staples and banking (which has the M&A and IPO revenue stream I mentioned earlier).
EARNINGS AND GROWTH
The secondary data-centre beneficiaries are becoming increasingly important. Vulcan Materials, Martin Marietta Materials and CRH all touted impressive construction demand related to data centres, utilities construction or both during their conference calls. The industrials sector – which is benefiting from the dual tailwinds of AI and increased defence spending – posted 10 per cent growth, a third straight strong quarter.
Data centre landlords have likewise seen profits and stock prices boom. The trend has picked up considerable steam since I first wrote about the broadening effect last year.
Putting it all together, S&P 500 companies grew aggregate earnings per share by 29 per cent from a year earlier, the strongest pace since 2021 and a clip the index rarely hits outside of recoveries from recession. It’s well over twice the 12 per cent growth that analysts expected before the reports. Some 84 per cent of all S&P 500 constituents delivered positive earnings surprises, also the most since 2021.
We need to be careful not to get too giddy. The AI aura hasn’t fully extended to some bread-and-butter parts of the economy. Although their aggregate earnings appear to have improved modestly last quarter, consumer discretionary and staples companies have been a decidedly mixed bag.
Their executives offered cautious commentary about the state of underlying demand. (You’ll notice that the discretionary sector index has a large exposure to AI, but that’s essentially Amazon. Exclude Amazon and the sector’s first-quarter earnings look much less impressive.)
To the extent that many of these companies are hanging in there, it may partially reflect another aspect of the AI narrative: the extraordinary wealth effect from the booming stock market. With hiring and real wage growth weak, the gains in Americans’ brokerage accounts and 401(k)s seem to be playing an outsized role in keeping consumption as resilient as it is, meaning any selloff would potentially deliver a fatal blow.
WHAT CAN BE DONE?
So what can you do about any of this? The simplest answer is to take steps to make your portfolio a bit less correlated and, ideally, less volatile. Among the sectors with low exposure to AI, energy looks to be the best diversifier at the moment. It’s always had lower volatility and a modest correlation to tech, but in the past year the correlation has turned negative. It’s also had strong returns, which makes an overweight energy portfolio look like a winner.
Consider what happens to the S&P 500 if your tech exposure was 10 percentage points lower than the index weight over the past 12 months and that money was instead put into other sectors, or a basket of Treasuries. Energy was the runaway best choice, slashing volatility while barely denting returns. Reducing tech holdings and buying Treasuries reduces volatility, but it also meaningfully reduces returns.
There are no miracle answers to the vexing question of how to play the AI boom – taking some profit risks missing out on an enduring hype cycle, but being overexposed to a single theme stores up a different kind of pain. Among lower correlation sectors, energy stocks have had a great run in the past year, but next year could well belong to unloved stocks from healthcare or another sector.
When an index’s fundamentals all revolve around a single mega-theme, it’s always worth remembering that fortunes can change in the blink of eye. And it’s worth having a few other irons on the fire.
Source: Bloomberg/zw(el)
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