Redefining Market Concentration in the Age of AI

Matt Stucky is the chief portfolio manager at Northwestern Mutual Wealth Management Company.

Three ways to define market concentration

Market concentration is often defined as the aggregate weight of the top 10 constituents within a cap-weighted benchmark. Historically, the S&P 500 has maintained an average concentration level of approximately 23 percent. However, the recent post-pandemic era has driven concentration levels significantly higher. Driven first by the understandable increased technology consumption during the pandemic and then supercharged by the aggressive capital allocation into mega-cap equities with significant artificial intelligence (AI) exposure, the index recently reached a peak concentration of almost 40 percent—the highest level in market history. Concentration levels have declined to 38 percent as of late due to concerns that the AI trade may have gotten ahead of itself, but it is still at levels much higher than the 24 percent seen at the start of the AI revolution in November 2022, marked by the launch of OpenAI’s ChatGPT.

While record-high concentration implies that a small cohort of stocks possess outsized impact on index returns, it does not necessarily indicate a total absence of broader participation. It can be a common misperception that index performance is isolated strictly to the top 10 holdings, but as we are seeing right now, it is very possible that mega-cap leaders can underperform the broader market. For this reason, we wanted to explore an alternative definition of market concentration—that is, market breadth—measured by the percentage of constituents outperforming the broader index. As of Jan. 31, 2026, 37 percent of the members of the S&P 500 have outperformed the benchmark on a trailing 12-month basis. While this remains below the historical average of 48 percent, it highlights that alpha can still be generated outside the narrow list of mega-cap leaders. The steady improvement we have seen over the last 12 months is a sign of a more resilient broadening out of the market.

Market-leading earnings growth and strong equity flows into AI-centric innovators have driven the lofty degree of concentration in the top 10 holdings, but it should be noted the broader market is fundamentally sensitive to the interest rate environment. With the Federal Reserve projected to implement two or three additional rate cuts this year, lower borrowing costs may serve as a significant tailwind for smaller, debt-dependent companies that are more economically sensitive. Consequently, a pivot toward a more accommodative monetary stance would seemingly facilitate further improvement in market breadth driven by both cheaper valuations and a more favorable earnings revision profile.

Intra-sector breadth exhibits similar constructive trends, particularly in the technology sector. The percentage of stocks outperforming the sector rose from 25 percent in 2024 to nearly 36 percent in 2025, still shy of the long-term average of 41 percent. Given that the technology sector represents over 30 percent of the S&P 500 and a substantial portion of the top 10 holdings, this internal broadening is a pivotal indicator of improving market sentiment.

If we take one step further beyond market breadth and consider market participation, defined as the percentage of stocks maintaining positive price action over a trailing time period, we see even more robust market strength. Currently, 65 percent of index constituents are trading above their 150-day moving average price, aligning with the long-term historical average. The trajectory of this metric highlights the market’s recovery from the deep sell-off caused by the Trump administration’s “Liberation Day” tariff announcement on April 2 of last year. Market confidence was subsequently restored through a sequence of bilateral trade agreements, Federal Reserve rate cuts and inflation data that was milder than initially feared. These participation levels underscore that the majority of index members are contributing to the broader market recovery rather than the gains being concentrated solely within the subsector of AI innovators.

Notwithstanding the rapid narrowing of the market, the ascending trend in breadth and participation suggests a strengthening environment for diversified capital allocation. While we maintain exposure to mega-cap technology leaders, this concentration necessitates a rigorous emphasis on fundamental analysis and valuation discipline. Our objective is to ensure that each holding in our equity strategies is rationalized by durable fundamentals rather than purely technical momentum.

Know what you own

In an environment characterized by heightened concentration and thematic “momentum chasing,” investors are increasingly susceptible to herd behavior. Assets acquired solely based on recent price appreciation—absent fundamental justification—are often the most vulnerable during a market rotation. We anticipate that those equities trading at extreme multiples without sound fundamentals will underperform peers anchored by reasonable valuations. Consequently, we advocate for a “know what you own” philosophy, prioritizing fundamentally driven relative value rather than pure momentum-driven price speculation.

High concentration is not inherently indicative of a market bubble. A “bubble” is typically defined by excessive price-multiple expansion that lacks a commensurate improvement in underlying company fundamentals. Conversely, if price appreciation is a response to earnings growth and structural innovation, we would deem that a rational response to improving fundamentals. While certain segments of the current AI cycle exhibit signs of speculative excess returns, others represent a reasonable valuation of transformative technological shifts.

To analyze such a divergence, we can examine an example of Nvidia (NVDA) and Tesla (TSLA). Nvidia is the lead chip manufacturer for graphics processing units (GPUs), which are essential to AI compute capacity, while Tesla is viewed as being at the forefront of AI-driven autonomous driving, robo-taxis and humanoid robotics. Between December 2022 and January 2026, NVDA and TSLA returned 1,200 percent and 250 percent, respectively. Considering these companies are revered as top AI innovators, it would make sense that they experienced outsized gains in the current market environment. However, if we look through two critical lenses, forward earnings trajectory and price-to-earnings (P/E) multiples, we see two unique narratives.

An analysis of NVDA reveals that its significant price appreciation is primarily underpinned by robust and accelerating earnings growth. Forward earnings estimates have surged 17,500 percent over the trailing four-year period. The stock’s multiple experienced a sharp expansion in early 2023 due to the step change higher in AI infrastructure capex spending but has moderated as the fundamental earnings story materialized. Notably, NVDA currently trades at a forward discount relative to the broader technology sector, suggesting that its performance is supported by strong fundamental results rather than being driven up on speculation.

Conversely, TSLA presents a more complex valuation profile. While the stock has demonstrated strong historical performance, recent forward earnings estimates and growth revisions indicate significant fundamental headwinds. Decelerating vehicle sales have damaged top-line assumptions, while increased cost structures have hurt margins, leading to a nearly 70 percent decline in net income since 2022. Despite the weakness in the core business, the stock has outperformed the S&P 500 by approximately 160 percent over the same time period, driven exclusively by multiple expansion—with investors paying a whopping 200x forward earnings for future growth prospects. Tangible progress from TSLA’s promise on autonomous driving, robo-taxis and humanoid robots has yet to be seen, and investors appear to be giving the company a long leash to prove this growth thesis. Regardless, the current multiple is one to invoke some degree of caution.

The Bottom line

The divergence between fundamentals-led growth and sentiment-driven expansion underscores the necessity of bottom-up security analysis. Market history consistently demonstrates that euphoria can decouple asset prices from intrinsic value, leading to irrational market behavior. To mitigate this risk of significant capital impairment, we reiterate the importance of a valuation-anchored investment thesis while also carefully considering that valuation profile within the context of business quality and ongoing fundamental strength.

The opinions expressed are those of Northwestern Mutual as of the date stated on this material and are subject to change. There is no guarantee that the forecasts made will come to pass. No investment strategy can guarantee a profit or protect against loss. Past performance is no guarantee of future results. This material does not constitute investment advice and is not intended as an endorsement of any investment or security. Information and opinions are derived from proprietary and non-proprietary sources. To learn more, click here.

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