Worried About AI-Related Risks in U.S. Stocks? Overseas Markets Are Even More Concentrated

Worried that the artificial intelligence (AI) boom is causing excessive concentration in U.S. stock market valuations and increasing investment risk? If investors are considering shifting to overseas markets for diversification, they may face an unpleasant reality: concentration in many overseas markets is actually more severe than in the U.S.

Market concentration refers to a situation where a small number of large-cap stocks account for a disproportionately high share of a market’s total value. For investors hoping to diversify risk through overseas investments, the data may be surprising.

The chart below shows the market capitalization share of the top 10 companies in major national stock indices as of June 15, revealing that many markets are highly dependent on a few leading firms.

This trend is particularly noteworthy for emerging market investors. In recent years, the strong performance of emerging markets has increasingly been driven by a handful of large companies in Taiwan and South Korea—two regions that host the world’s most critical AI hardware suppliers.

Taiwan and South Korea control key segments of the AI supply chain, including semiconductor and memory chips. As global efforts to build AI data centers and train larger AI models accelerate, these companies have become the biggest beneficiaries.

Michael Mortimore, partner at NS Partners, told MarketWatch that the rally in emerging markets has been even “narrower” than that in U.S. equities.

This concentration trend is reflected in benchmark indices. Mortimore noted that Taiwan and South Korea accounted for about a quarter of the weight in the MSCI Emerging Markets Index two to three years ago, but now exceed half.

According to FactSet data, as of June 30, the information technology sector weight in the MSCI Emerging Markets Index reached 45%, compared to 37.1% for the technology sector in the S&P 500 Index.

This means that emerging markets have, for the first time in recent years, surpassed the U.S. in technology sector weighting.

For average investors, the biggest risk is that attempts to reduce reliance on U.S. tech stocks by investing overseas may backfire. Due to the AI-driven surge in a few large-cap stocks, many international and emerging market funds may actually have far greater exposure to chips, memory, and AI data center capital spending than investors realize. The market is already beginning to question how long the AI boom can last.

Why is this happening?

Mortimore attributes this phenomenon partly to shifts in the macroeconomic environment. Last year, a weaker U.S. dollar and declining U.S. Treasury yields led to broad gains across emerging markets. But this year, a stronger dollar has weakened overall emerging market performance, allowing only a few AI leaders to significantly outperform.

Mortimore further pointed out that since the Iran conflict erupted on February 28, the U.S. dollar, Treasury yields, and oil prices have all risen, creating headwinds for many emerging markets. India’s stock market, for example, has recently come under pressure as a sensitive case.

Meanwhile, growth in AI capital expenditure continues to exceed market expectations.

Mortimore stated that despite macro headwinds, AI capex has grown rapidly and consistently surpassed forecasts. For investors over the past few months, AI has almost become the only viable investment theme.

Is this a global bubble?

The strong rise in AI-related stocks has sparked global concerns about a bubble. However, Mortimore is reluctant to label the current emerging market AI rally as a bubble.

He noted that although related stocks in emerging markets have risen sharply over the past year and a half, overall valuations have actually declined, making the current situation different from a typical valuation bubble.

Mortimore said they are very hesitant to use the word “bubble.” He believes the current rally is primarily driven by significant corporate earnings growth.

That said, he is not entirely complacent. He likened the current situation to the early 2000s commodity supercycle driven by Chinese demand, when rapid economic growth in China boosted raw material demand, benefiting mining giants like Rio Tinto and BHP for years.

Angelo Kourkafas, senior global strategist at Edward Jones, shares a similar view. He said the near-parabolic rise in some emerging market AI stocks is primarily due to earnings growth, not just valuation expansion. With demand surging and supply lagging, corporate profits have improved rapidly.

Unlike traditional tech bubbles, the current market has fundamental support. The estimated earnings growth rate for emerging market companies over the next 12 months is around 50%.

However, risks remain. Kourkafas is closely watching for signs of excessive speculation, such as investors borrowing to invest or heavily using leveraged ETFs to chase AI stocks.

Given the high concentration of capital, even a slowdown in AI investment growth—while still positive—could trigger significant corrections in related stocks. Mortimore believes the key lies in whether the AI application layer can eventually generate enough profits to justify the massive capital spending on the hardware layer.

He noted that current supply chain bottlenecks in memory, cooling, and networking equipment reflect real demand. But companies must ultimately generate sufficient profits through AI to prove the economic viability of these massive investments.

Mortimore also warned investors to monitor whether supply is catching up with demand. If new production capacity continues to come online or more competitors enter the market, it could signal that the AI hardware cycle is maturing, leading to weaker pricing power and compressed profit margins.

How should investors respond?

Richard Flax, Chief Investment Officer at Moneyfarm, suggests that one way to reduce concentration risk is equal-weighted allocation. Investors specifically wanting to reduce exposure to South Korea’s popular market could consider emerging market indices that exclude South Korea, though they should be aware of the opportunity cost if those stocks continue to rise.

Meanwhile, Kourkafas recommends a “barbell strategy”: maintaining exposure to U.S. and emerging market AI stocks while adding positions in European, Japanese, and U.S. mid-cap stocks, which have higher allocations to industrial, financial, and other cyclical sectors.

He noted that investors can free up allocation space by reducing traditional defensive stocks, which typically underperform during periods of economic expansion and sustained bull markets.