The Rise of Tech Giants and the AI-Driven Market
The global stock market is witnessing a significant shift, with an increasing number of major US companies going public. This trend is expected to further concentrate the world’s largest sharemarket around technology giants, making future performance increasingly tied to the profitability of artificial intelligence (AI). Investors are closely watching this development, as it could have far-reaching implications for the economy and financial markets.
SpaceX's Historic IPO
One of the most anticipated events in the tech sector is the upcoming initial public offering (IPO) of SpaceX, Elon Musk’s reusable rocket company. This will be the biggest sharemarket float in history, with the company aiming to raise $US75 billion (approximately $106 billion), valuing it at an estimated $US1.75 trillion.
SpaceX has a strong AI component, and its IPO, along with those of Anthropic and OpenAI, is set to expand the so-called “Magnificent Seven” group of US tech behemoths. These include Apple, Microsoft, Amazon, Alphabet, Meta Platforms, Tesla, and Nvidia. The term "Magnificent Seven" refers to their size, profitability, and influence over their respective industries.
Growing Influence of the Magnificent Seven
According to research from Old Dominion University, the Magnificent Seven’s weight in the S&P 500 has grown significantly, rising from less than 7 per cent in 2010 to over 30 per cent by 2024. This concentration makes the market especially vulnerable to shifts in perceptions about the use and value of AI and its applications, according to Dr Kevin Hebner, managing director and global investment strategist at TD Epoch.
Hebner highlighted that the market is particularly focused on three companies: Nvidia, Anthropic, and SpaceX. He expressed concerns about the transition to capex-heavy business models and the potential delay in the positive impact of AI on productivity and revenues.
SpaceX and AI Integration
SpaceX has made significant moves in the AI space, including the acquisition of Musk’s AI outfit xAI in February, which was valued at $US250 billion. This acquisition places AI at the core of Musk’s space ambitions. In addition to reusable rockets and Starlink satellite-enabled internet, part of SpaceX’s plan involves using heavy-lift Starship V3 rockets to carry solar-powered data centres into orbit. Once there, these data centres are expected to process massive, energy-intensive AI workloads, free from the constraints of terrestrial electricity grids and carbon concerns.
This vision of space exploration is described by Hebner as “effectively a call option on space and all the future possibilities that come with that.” A call option gives buyers the right to buy a specific asset at a pre-set price.
Market Concentration and Implications
The seemingly ever-rising valuations of these tech giants are creating their own effects on the market. Hong Hon, manager of global equities at Lonsec, noted that a handful of stocks, particularly within the Magnificent Seven cohort, now account for a disproportionate share of the overall market capitalisation and returns. This can skew the opportunity set for active managers who are benchmarked to these indices.
This concentration means that sentiment around these stocks can become critical. For example, in January, AI-chipmaker Nvidia suffered the worst single-day market cap loss in history, shedding nearly 17 per cent or $US589 billion after a Chinese AI company revealed the low cost of training its AI model.
Index Construction and Feedback Loops
Hon pointed out that traditional index construction approaches, such as market cap weighting, naturally amplify the influence of winners. Last week, S&P Dow Jones Indices decided against easing its criteria to allow a listed SpaceX to join the S&P 500 before a full year of profitability. As markets reward a narrow cohort of stocks, their index weights increase, further concentrating benchmark exposure and reinforcing a feedback loop.
Comparisons to Past Economic Shifts
The AI-driven and future-facing valuations of the Magnificent Seven (or Ten, once SpaceX, Anthropic, and OpenAI are added) are so grandiose that investors are reaching back to the past for comparisons. Datt Capital chief information officer Emanuel Datt noted that when the American railroads were being built in the 19th century, investors rushed to own the rail companies, but the real wealth was created by the businesses that shipped goods across those rails.
Datt suggests that AI companies, which are helping propel the outsized performance of the market, may not be too different from railroads in the role they have for the economy. He questions whether other companies may end up making higher returns from AI in the future, similar to how railroads themselves weren’t as profitable as the commerce made possible by the tracks after they were laid in the late 19th century in the US.
Market Volatility and Investor Caution
A sign of faltering faith in the boundless profits of AI infrastructure was visible last week, as concerns about overvaluation of tech stocks sent the S&P 500 dropping 2.6 per cent on Friday, ending a 10-week stretch of gains. The tech-centric Nasdaq 100 fell about 5 per cent.
Even as retail investors reportedly flock to SpaceX stock, the broader question of how profitable AI will be, and indeed, where it sits within the economy, persists.
Portfolio Strategies for ETF Investors
Hebner advised exchange-traded fund (ETF) investors to consider a “barbell structure” for their portfolios. One emphasis should be clearly on tech, while the second should focus on real assets such as commodities and infrastructure. This approach reflects the capex-heavy nature of AI, as well as the fact that almost all countries are increasing spending on industrial policy, infrastructure, energy, and defence.
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