Neglected Risks for U.S. Equities: AI Concentration, Deteriorating Breadth & Weak Foreign Markets

By Victor Sperandeo with the Curmudgeon

U.S. Mega Cap Tech Stock Concentration:

For months and years now, we’ve warned that the S&P 500 index (ETFs and mutual funds) offers far less diversification than its 500-company label suggests. Its top-heavy weighting in mega-cap technology and AI-related stocks leaves investors disproportionately exposed to the fortunes of a small group of companies.

Last week, in “Robust Big Tech Stocks Masking Substantial Market Risks” we wrote, “10 big name tech stocks currently make up 40% of the S&P 500 market cap. These stocks have even a higher weighting in the Nasdaq 100 (QQQ ETF) at 61.4% to 65.2% and the Nasdaq Composite index at 51% to 53%."

From Reuters (paywall):

“Wall Street's record-breaking highs mask historic levels of concentration and narrow breadth. Treasury yields are now so high that, depending on your perspective, they either represent a generational buying opportunity or are about to send the equity rally ‌screeching into reverse. Meanwhile, the spiking “term premium” could slam both stocks and bonds.”

“Tech and AI stocks now comprise over 40% of the S&P 500’s market cap. That’s higher than the peak of the dotcom bubble in early 2000. Add in AI-related companies, and tech’s footprint tops 50%, ⁠also a record.”

“The current ratio of the equal-weighted S&P 500 index to the market cap-weighted index is collapsing, based on Invesco's RSP EW exchange-traded fund and the SPY ETF. The main US index, in which stocks have equal weighting is under-performing the more widely followed index by the widest margin in 24 years. That’s almost entirely due to the strong performance of tech and AI names, suggesting corporate America overall is not quite as strong as the record-breaking S&P 500 headlines suggest.”

Total Dominance of the AI Trade:

Katie Martin wrote in Saturday’s print FT [paywall]:

“Three-quarters of the stocks in the S& P fell last month — tech stocks and the energy stocks that reflect the data center build-out really are doing all the work. Who cares? A lot of people don’t, as long as the line on the index goes up. The problem is that professional investors are struggling to figure out how to diversify properly, how to shield themselves if something goes wrong — a crucial part of their task in managing other people’s money. Many are spooked by just how correlated portfolios turn out to be across a range of supposedly diverse asset classes.”

“We’re left with a strikingly two-speed U.S. stock market beloved of pretty much every investor on the planet, dominated by an AI build-out that is, in practical terms, nearly impossible to hedge or avoid. We don’t really understand the long-term economic implications, but the underlying commercial assumptions seem rather heroic. And we’ve all, deliberately or otherwise, hitched our fortunes to the idea that it will work out just fine. We’d better be right.”

Victor: Global Market Weakness - an Underappreciated Risk for U.S. Equities:

The divergence between U.S. equities and several major overseas markets represents an underappreciated risk for investors. Technology and AI-related investment continue to support selected markets, but that strength should not be mistaken for evidence of broad-based economic resilience. The U.S. stock market may be outperforming today, but it is not insulated from weaker growth abroad, rising interest rates, or another energy-price shock.

The reported year-to-date % returns (through Friday, October 9, 2026) illustrate the disparity:

· China’s CNYA ETF: −4.73%.

· India’s INDA ETF: −14.84%.

· Germany’s DAX: −4.43%.

· France’s CAC 40: −4.76%.

· Hong Kong’s Hang Seng: −8.08%.

· Italy’s EWI ETF: +2.10%, despite a substantial decline since August 5^th.

· Spain’s EWP ETF: +5.85%, despite retreating from its August 23 peak.

· United Kingdom’s FTSE: +6.04%, although its recent trend is downward.

· Japan’s Nikkei 225: +33.18%.

· Brazil’s Ibovespa: +29.75% [that is the local-currency index return—not the return on the U.S.-listed EWZ ETF].

China and India, the world’s two most populous countries, together accounting for approximately one-third of the global population—stand out for their negative equity returns. Meanwhile, positive year-to-date performance in Italy, Spain, and the United Kingdom masks more recent deterioration. A market can remain above its starting level for the year while already moving decisively lower.

Japan stands out among the markets listed, with the Nikkei 225 up 33.18%. Its rally has been attributed to corporate-governance reforms, AI and semiconductor investment, and expectations of pro-growth political leadership. The relevant parallel with the U.S. Nasdaq-100 (QQQ ETF) is that enthusiasm for favored investment themes can support equity performance without establishing broad-based economic strength.

Brazil also warrants special treatment. The reported ~30% YTD rally reflects optimism about a more market-oriented political direction associated with Flávio Bolsonaro. But with a second round of voting still ahead, investors should distinguish expectations from a settled outcome. Electoral uncertainty and potential institutional constraints remain material risks. The market’s policy expectations center on fiscal restraint and lower financing costs.

Bloomberg reported that the Brazil election results triggered a roughly 5% real (BRL) currency appreciation and a decline of more than 100 basis points in swap rates as investors anticipated lower future borrowing costs. Foreign investors also poured a record net 10.06 billion real (BRL) into Brazilian stocks on October 5^th. That’s ~ U.S. $2.02 billion, using the reported October 5, 2026, exchange rate of R$4.99 per U.S. dollar.

Why the Divergences Matter for U.S. Equities:

Victor’s concern is that the U.S. may be benefiting from a narrow set of powerful investment themes while broader international conditions deteriorate. Weak advance–decline breadth (more below, including a proprietary chart) would reinforce that concern: headline stock index gains are concealing weakness across much of the equity market.

Stock-market declines alone do not establish that global GDP is contracting. Nevertheless, weaker overseas demand, higher financing costs, and deteriorating market participation would create an increasingly unfavorable backdrop for U.S. corporate earnings and valuations. If interest rates continue to rise internationally, that pressure will intensify.

Energy Prices Could Compound the Pressure:

The U.S. Iran conflict adds another potential source of inflation and economic weakness. Prolonged disruption—or a persistent threat to shipping—through the Strait of Hormuz could keep crude oil and refined-product prices elevated. Any durable Iranian ability to impede transit would represent a continuing geopolitical risk premium, not merely a temporary wartime disturbance.

Higher fuel costs would flow through transportation, production, and essential goods and services, many of which offer limited opportunities for substitution in the short run. That would squeeze household purchasing power and corporate margins simultaneously.

The Federal Reserve can restrain demand by raising short term interest rates, but it cannot produce oil or reopen a disrupted shipping route. A sustained energy-supply shock would therefore leave policymakers confronting an uncomfortable combination: weaker growth and persistent inflation. That is precisely the kind of risk a technology-led equity rally can obscure.

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Negative U.S. Stock Market Breadth (Advances vs Declines):

Deteriorating market breadth is a warning that U.S. equity index gains (e.g. S&P 500 and Nasdaq) are becoming less durable and the market more vulnerable to a significant correction.

The Advance-Decline (A-D) Line—the cumulative difference between the number of advancing and declining stocks—is a widely used measure of market participation. Its interpretation, however, has limitations.

Assessing divergence typically requires comparing the A-D Line with a benchmark such as the S&P 500, making the magnitude of that divergence difficult to quantify consistently.

InvesTech’s proprietary A/D Divergence Index seeks to address these limitations by comparing the S&P 500’s actual level with a hypothetical level implied by breadth trends, while adjusting for the reported effects of decimalization. A broadly sideways reading indicates that prices and participation are moving proportionately, supporting the underlying advance. A steep decline like the one in the chart below signals that index performance is outpacing its breadth support: headline gains increasingly conceal weakening participation.

Source: Investech Research

For U.S. equities, that divergence carries a bearish implication. An advance supported by fewer stocks is more dependent on continued strength in its remaining leaders and more exposed if those leaders falter. When the divergence reaches historically significant levels and other breadth indicators confirm the deterioration, it strengthens the warning of a major correction or bear market. It is a signal of rising downside risk—not a precise forecast of when the market will turn.

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Victor’s Conclusions:

Market risks should become more apparent as the election approaches. In my view, the divergence among key financial stocks supports the case for caution.

For example, American Express shares were down -16.70% YTD through October 9, 2026—on a price-return basis excluding dividends. That suggests its affluent clients are spending less. If that retrenchment continues, holiday spending could disappoint.

Visa, on the other hand, is up +11.25%. I interpret that relative strength less as evidence of a healthy consumer than as a sign that households are increasingly financing necessities with credit-card debt, at an average interest rate of +22.36% and rates reaching 25%.

Goldman Sachs adds another cautionary signal. The stock is down 2.08% year to date and has fallen from its July 13 closing price of $1,140 to $895.32. My downside target is $800. That deterioration also raises questions about the outlook for Wall Street’s year-end bonuses.

The current sequence of financial markets is characteristic of a U.S. stock market top: Treasuries weaken first, foreign equity markets follow, and deteriorating breadth signal growing weakness beneath the headline major U.S. stock indexes (i.e. S&P 500 and NASDAQ). Against that backdrop, maintaining outsized exposure to mega-cap stocks looks like an increasingly unfavorable risk-reward proposition.

End Quote:

As they say in the oil business, “money returns to its rightful owners.”

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Wishing you good health, success, and good luck. Till next time……………………………

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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