Will a Few Star Stocks Continue Leading in Q3? Institutional Insight: Market Concentration to Reshape, Long-Term Outlook on Three Power Sectors

Since the third quarter of this year, global stock markets have faced a dual challenge: a significant rise in performance concentration and a notable acceleration in price volatility in both speed and magnitude. Fabiana Fedeli, Head of Equities, Multi-Asset & Sustainable Development at M&G English, notes that while corporate profits are currently strong and growth rapid, the number of companies capable of sustaining high profitability has significantly decreased. The dominance of a few stocks over broader market gains is only temporary, and M&G English advises investors to adopt a 'stock-picking' strategy. The team is strategically focusing on long-term investment opportunities in three areas: 'electrification,' 'power infrastructure,' and 'enabling industrial technologies'.

A Few Stocks Drive Most Gains – Volatility Becomes the New Normal

Fedeli points out that the current level of market concentration is astonishing. In the U.S. market, for example, 80% of the S&P 500’s 10.2% total return in the first half of this year came from just 13 stocks. The Asian market shows similar concentration: the MSCI Asia Pacific (ex-Japan) Index rose 23.9% in the first half, with approximately 80% of that gain driven by only three companies among its 1,048 constituents.

At the same time, the phenomenon of 'extreme volatility'—where stock prices double within weeks only to sharply retreat—has become a defining feature of today’s market. Factors such as constant, round-the-clock information flow, narrative-driven quantitative trading, and active retail participation in derivatives markets are structural drivers behind heightened price swings and rising concentration.

AI Fuels Capital Expenditure Surge – Concentration is Temporary

Although artificial intelligence (AI) has generated unprecedented revenue and profit growth, attracting intense market capital, Fedeli believes that while AI itself is a transformative structural force in work and life, the current capital concentration in a few AI-beneficiary stocks is likely temporary.

As supply bottlenecks emerge, capital expenditure slows, or capacity adjustments occur, some companies will struggle to meet sky-high market expectations, and stock prices will eventually revert to reality. Historical precedent shows that the companies defining the current cycle may not define the next, and leadership in the market will inevitably undergo a 'reshuffle'.

Active Stock Picking to Exploit Pricing Imbalances

In the face of an extremely concentrated market, shifting to passive, market-cap-weighted investing may not be the optimal solution. Fedeli recommends that investors use active management and stock selection to identify mispriced opportunities. Diversification does not mean randomly spreading investments across sectors, but carefully selecting securities where price and intrinsic value show a significant gap.

In terms of specific investment themes, in addition to maintaining focus on key AI infrastructure suppliers with proven business models and stable cash flows, the team is turning its attention to long-term demand themes such as electrification, power infrastructure, and enabling industrial technologies. Furthermore, non-tech sectors actively adopting AI applications—spanning energy, industry, healthcare, finance, and consumer goods—as well as regional plays like Japanese corporate transformation, European energy security, and Chinese tech leaders, also contain deeply attractive long-term value.