The European Central Bank’s latest Financial Stability Review, published at the end of November, argued that valuations in US technology firms such as Alphabet, Meta, Microsoft and Nvidia are looking stretched, driven in part by a ‘fear of missing out’ among investors. Indeed, 2025’s equity market has seen leadership skewed heavily towards a narrow cohort of AI-exposed and mega-cap technology companies.
The consequences for portfolio construction are clear: investors must recognise both the opportunity and the concentration risk embedded in today’s indices and adopt an investment framework designed to endure periods when sentiment dominates returns, not fundamentals.
Over the past 12 months, markets have been propelled by enthusiasm for artificial intelligence and its potential to reshape industries. Some of the companies at the centre of this story have delivered truly outsized gains, with Nvidia’s data-centre revenues continuing to support its soaring market capitalisation.
On the other hand, a large portion of this rally has been narrative-driven, as firms with limited current revenue or profitability have been aggressively re-rated on the basis of future promise alone. Oklo, which is valued in the billions despite having no revenues, illustrates the potential speculative excesses that can emerge when investors chase thematic exposure.
Sector-specific shocks
This dynamic has been amplified by passive investing. Market-cap-weighted indices naturally allocate the most capital to the largest companies, meaning a small group of US tech giants now account for a very large share of global indices. When equity market leadership narrows in this way, portfolios become vulnerable to sector-specific shocks such as regulatory action, interest-rate moves and setbacks to profitability.
While some of the AI companies at the forefront of the sector genuinely merit premium multiples, the gap between valuation and financial performance in parts of the market means allocators should be thinking more carefully about where they place capital.
Ultimately, portfolios focused on fundamentals, diversification and considered stock selection should better weather up and down markets and deliver better long-term returns – albeit not over every short-term period relative to the market.
“Investors must recognise both the opportunity and the concentration risk embedded in today’s indices and adopt a framework designed to endure periods when sentiment dominates returns, not fundamentals.
Picks for ‘26 – read more
Artificial intelligence: Stuart Gray, WTW – Potential v FOMO – the two sides of the AI coin
Global growth: Daniel Murray, EFG Bank – Global risks and opportunities for the year ahead
Healthcare: James Douglas, Polar Capital – Is healthcare the smart complement to tech?
Luxury brands: Sean Koung Sun, Thornburg IM – Scarcity is engine of long-term value creation
US smallcaps: Bill Hench, First Eagle Investments – US smallcaps look poised for a comeback
Active management is difficult and no single manager will outperform under all market conditions, which argues for a multi-manager, high conviction approach that combines complementary styles such as value, growth and quality.
This way, returns may be driven by high-conviction stockpicking over the longer term, while not becoming beholden to any one style in the short run. Investors may also wish to combine fundamental stockpickers with quantitative or smart beta strategies as another differentiated source of return.
Skilled stockpickers can deliver outperformance in the long term by concentrating capital into their best ideas. Combining several concentrated stockpickers diversifies manager-specific risk while preserving active share at the portfolio level.
Meanwhile, disciplined quantitative strategies can add value through systematic exposures to factors that are intended to exploit the behavioural biases of other investors. Their robust approach to risk management guards against outsize bets versus the market in the shorter term. This broad factor exposure provides diversification alongside the concentrated long-term stockpicking approach of the fundamental managers.
Rigorous manager selection
The success of such a strategy depends on rigorous manager selection, careful portfolio construction and active rebalancing. Investors should ask managers to explain their highest conviction holdings, alignment with stated investment philosophy, risk controls and how they will behave in a drawdown. Fees matter too – as scale and longstanding relationships with managers can help keep costs competitive without sacrificing skill.
Investors should not avoid technology or AI holdings altogether but, rather, understand today’s market consists of a high valuation, likely sentiment-driven segment alongside a broader opportunity-set of fundamentally attractive companies that the market currently underprices.
As sentiment normalises, fundamentals tend to reassert themselves. Portfolios built around durable business models, disciplined valuation frameworks and a blend of active and systematic approaches are best placed to capture this shift.
Allocators who recognise inflated valuations where they exist, protect against concentration risk and prioritise stock selection skill are best placed to tackle the uncertain markets that lie ahead. A combination of strong fundamentals, diversification and active conviction primes underlying portfolios to remain resilient in the face of challenges both known and unknown.
Stuart Gray is a senior director and equity portfolio manager at WTW
