Investors say the upcoming wave of big U.S. float stocks will further concentrate the world’s largest stock market around technology giants, pushing future performance ever closer to the profitability of artificial intelligence.
This week is set to be the biggest stock price move in history. Elon Musk’s reusable rocket company SpaceX plans to raise $75 billion ($106 billion), valuing it at an estimated $1.75 trillion.
space x It has a large AI component. Its initial public offering, along with those expected to come from Anthropic and OpenAI, will join the so-called “Magnificent Seven” group of American technology giants: Apple, Microsoft, Amazon, Alphabet, Meta Platforms, Tesla and Nvidia. These companies are named for their size, profits, and ability to form their own industries.
The Magnificent Seven’s weight in the S&P 500 index has increased from less than 7% in 2010 to more than 30% by 2024, according to a study by Old Dominion University.
This concentration makes the market particularly vulnerable to changing perceptions about the use and value of AI and its applications, according to Dr. Kevin Hebner, managing director and global investment strategist at New York-based TD Epoch.
“The market is looking at three companies in particular: Nvidia, Anthropic, and SpaceX,” Hebner said. “This is particularly concerning given the shift to capital investment-heavy business models and our view that it will take longer than consensus expects for AI to have a positive impact on productivity and revenue.”
SpaceX acquired Musk’s AI company xAI in February, valuing it at $250 billion and making it central to Musk’s space ambitions. In addition to reusable rockets and Starlink satellite-based internet, part of SpaceX’s plan is to use its still-completed heavy-lift Starship V3 rocket to carry a solar-powered data center into orbit. Once there, they will be able to handle large-scale, energy-intensive AI workloads, free from the constraints of terrestrial power grids and carbon issues.
Musk’s space vision for the market is “effectively a call option on space and all the future possibilities that come with it,” Hebner said. (A call option gives the buyer the right to buy a specific asset at a preset price).
Valuations, which appear to continue to rise, are having their own impact on the market.
“Currently, some stocks, particularly those in the Magnificent Seven, account for a disproportionate share of overall market capitalization and returns, effectively distorting the opportunities set for active managers benchmarking these indexes,” said Hong Hong, global equity manager at Lonsec.
This concentration means sentiment towards this set of stocks could be critical. In January, AI chip maker Nvidia suffered its worst single-day market capitalization loss in history, losing nearly 17 percent, or $589 billion, in a brief panic after the Chinese AI company disclosed that its AI models had low training costs.
“The structural change is important because traditional index construction approaches (i.e. market cap weighting) naturally amplify the influence of winners,” Hong said.
Last week, S&P Dow Jones Indices decided not to relax its criteria for allowing publicly traded SpaceX to join the S&P 500 before it becomes profitable for the full year.
“As the market rewards a narrower group of stocks, the weighting of those indexes increases, making exposure to the benchmark more concentrated and reinforcing the feedback loop,” Hong said.
The AI-driven, forward-looking valuations of the Magnificent Seven (ten if you add SpaceX, Anthropic, and OpenAI) are so epic that investors are reaching into the past for comparison.
“We’ve seen this before,” said Emmanuel Dutt, chief information officer at Dutt Capital. “When America’s railroads were being built in the 19th century, investors rushed to own railroad companies, but the real wealth was created by the companies that transported goods across the railroads.”
Dutt says the AI companies that are helping drive extraordinary market performance may not be all that different from railways in their role for the economy.
Seeing the growing importance of AI among the Magnificent Ten, Dutt said: “The question investors should be asking is: Who benefits from using AI?”
He wondered whether other companies would see higher returns from AI in the future once the current AI investment frenzy passes, just as railroads themselves were not as lucrative as the commerce enabled by railroad tracks built in the late 19th century in the United States.
Perhaps there were signs last week that faith in the limitless benefits of AI infrastructure is being shaken. Concerns about overvaluation in tech stocks caused the S&P 500 index to fall 2.6% on Friday, ending a 10-week rally. The tech-heavy Nasdaq 100 fell about 5%.
Despite retail investors reportedly flocking to SpaceX stock, broader questions remain about how profitable AI will be and what its place in the economy actually is.
For exchange-traded fund investors, Hebner said TD Epoch recommends a “barbell structure” for their portfolios. “One focus is obviously technology, and the second is real assets like goods and infrastructure.
“This reflects the high level of capital investment in AI and the fact that almost all countries are increasing spending on industrial policy, infrastructure, energy and defense,” he said.
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