Nabtrade outage

Non-individual and NEL onboarding may be unavailable between Friday (14 June) 20:00 to Sunday (16 June) 20:30 for scheduled maintenance.


Is AI’s mega-rally sustainable?

Even with AI, the market will broaden, and peak concentration will unwind. Alastair MacLeod from Wheelhouse Partners believes this may have already started, but why?

Alastair MacLeod | Wheelhouse Partners

Global equity markets today are at their most concentrated for over 50 years. The rush for AI exposure has pushed the mega-cap technology names ever higher, which due to their ever-increasing size, means there has never been a time when the largest stocks account for so much of the world’s equity indexes.

Historically, spikes in market concentration have always unwound. We believe we might be seeing green shoots of that today.

Magnificent utilities

When reviewing year to date returns, it should come as no surprise that Nvidia and another tech stock SBC are amongst the best performing securities in the S&P 500 Index. What perhaps is surprising, is that three electric utility companies are also amongst the best stocks to have owned so far this year.

Source: Bloomberg, Wheelhouse, Calendar year returns to 17/5/24

Aside from the remarkable news that a utility has appreciated more than 100% within 5 months, it’s also worth highlighting the move in copper which is up over 25% year to date. To some extent this explains why the S&P500 has slightly outperformed the tech-heavy Nasdaq year to date.

AI needs (a lot) more power

The AI theme is broadening. Investors have realised how energy intensive AI actually is, with the chart below from Dominion Energy highlighting just how much more energy is required for an AI equipped datacentre, versus a legacy version.

Source: Dominion Energy via zerohedge

When combined with an underinvested energy generation and transmission grid, it’s no wonder forecasters are calling for a boom in capital expenditures in the utilities sector. This represents investment in power plants & generation, transmission lines, infrastructure… steel, concrete, power management technology and infrastructure… many ‘old economy’ industrials might just do okay as well out of AI.

Market broadening

The last time the market was anywhere near this concentrated was during the tech bubble, from which the subsequent collapse saw a powerful reversal of market concentration.

“This time is different” is a refrain we often hear when making comparisons to March 2000. The companies driving the current boom are universally regarded as awesome, with balance sheet strength, huge profits and monopolistic market positions. We don’t disagree that the mega-cap tech names are for the most part, magnificent.

However, there are laws regarding large numbers and the challenges of maintaining super-normal growth rates. It just becomes much, much harder to maintain high growth on already super-sized revenues. Forecasts from RBC suggest that earnings growth differential is set to slow in coming years.

Source: RBC via TME

When put together, the broadening of the AI demand thesis, plus the increasingly high hurdles that mega-cap growth companies (of any persuasion) have in terms of maintaining high growth rates, we don’t believe this time is different. At least from a market concentration unwind perspective.

When high market concentration unwinds, equal weighted index exposures always outperform cap-weighted exposures. The mega-cap tech names don’t need to crash like Cisco and AOL did 20-odd years ago, they simply need to underperform relative to the rest of the market.

In our view, the only thing better than an equal weighted exposure in the current environment is an equal-weighted exposure paired with a cap-weighted short (we are short index options via the buywrite overlay). While this combination has been a powerful headwind for our Global fund returns the past 12-18 months, as market concentration unwinds we believe it may prove a powerful tailwind for future years.


Learn how the industry leaders are navigating today's market every morning at 6am. Access Livewire Markets Today.


All prices and analysis at 22 May 2024.  This document was originally published in Livewire Markets on 22 May 2024. This information has been prepared by Wheelhouse Partners (ABN 26 618 156 200)( AFSL 541328).

The content is distributed by WealthHub Securities Limited (WSL) (ABN 83 089 718 249)(AFSL No. 230704). WSL is a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited (ABN 12 004 044 937)(AFSL No. 230686) (NAB). NAB doesn’t guarantee its subsidiaries’ obligations or performance, or the products or services its subsidiaries offer.  This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice.  Past performance is not a reliable indicator of future performance.  Any comments, suggestions or views presented do not reflect the views of WSL and/or NAB.  Subject to any terms implied by law and which cannot be excluded, neither WSL nor NAB shall be liable for any errors, omissions, defects or misrepresentations in the information or general advice including any third party sourced data (including by reasons of negligence, negligent misstatement or otherwise) or for any loss or damage (whether direct or indirect) suffered by persons who use or rely on the general advice or information. If any law prohibits the exclusion of such liability, WSL and NAB limit its liability to the re-supply of the information, provided that such limitation is permitted by law and is fair and reasonable. For more information, please click here.

About the Author
Livewire Markets

Livewire Markets is Australia’s leading source of investment insights and analysis. Over 700 of Australia's most experienced and qualified decision-makers share their views directly with you on all things investing. These are highly vetted investment professionals with years of real market experience, including Chief Investment Officers, Portfolio Managers, Analysts and Economists. And now, Market Index has joined forces with Livewire to become Australia’s largest source of dedicated investment information. You’ll never be left behind with more expert analysis and data to help you make the best investment decisions.

  1. Expert analysis and insights to make more informed investment decisions.
  2. Free analysis and insights from 700+ of Australia's top financial leaders
  3. Access to performance data on over 250 managed funds
  4. Curated investment insights delivered every morning
  5. Never miss an update or opportunity

Learn how the industry leaders are navigating today's market every morning at 6am. Access Livewire Markets Today.