High market concentration may not be irrational, Oppenheimer writes. The scale of investment needed to compete in AI rules out smaller companies. But even if it’s rational, it’s a risk for investors.
“With markets being increasingly dependent on the fortunes of so few, the collateral damage of stock-specific mistakes is likely to be particularly high,” he writes. “A market that becomes dominated by a few stocks becomes increasingly vulnerable to either disruption or anti-trust regulation. Even companies that have enjoyed near monopoly power in the past have ultimately succumbed to these pressures.”
To illustrate this point, Oppenheimer notes that there are only 51 companies that have appeared every year in the Fortune 500 since 1955. That means just a little more than 10% of the Fortune 500 companies in 1955 have remained on the list during the past 69 years. If history is any guide, most of today’s Fortune 500 companies will no longer exist as they do now in 70 years.
They “will be replaced by new companies in new, emerging industries that we can’t even imagine today,” Oppenheimer writes.
As concentration has increased, diversification is more important
While technology stocks may not be in a bubble, Oppenheimer writes that it may be important to diversify and reduce the risks from market concentration.
He points out that there are plenty of companies outside the tech sector that have high margins and returns on investment, that reinvest for future growth, and that have strong balance sheets.
Meanwhile, companies outside of tech will likely make use of AI advances as well. Healthcare and biotech companies are likely to benefit from AI innovation, and banks and financial companies may be able to improve their return on equity by adopting AI. New consumer products and services are likely to emerge, eventually, on the back of these technologies. There are signs that AI will provide more sophisticated cyber-security services and allow for the development of much more advanced robotics.
“Of course, it is not possible to anticipate what these products may be or who is likely to develop them,” Oppenheimer writes. “But that is another reason for ensuring broad diversification in equity exposure.”
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Source: goldmansachs.com
