Warning, your portfolio might be an AI bubble

Companies and sectors attached to the AI trade are storming ahead in returns and market narrative, but that doesn’t mean your whole portfolio should be ‘AI winners’.

Being able to attach yourself to AI in any way has become a common theme in equity markets, and companies have been rewarded for it.

The tech-heavy Nasdaq 100 has outpaced its domestic S&P 500 peer and the global benchmarks over the past year. The Nasdaq 100 made almost 40% while S&P 500 and MSCI ACWI returned 29% and 26%, respectively, according to FE Analytics data.

To try and cash in, many companies are actively attempting to showcase themselves as part of the AI theme, with the phrase referenced in 68% of investor calls among S&P 500 companies so far this year, increasing to 90% in more tech heavy sectors like IT and Finance.

Everyone is an AI winner, apparently

Some have done it deliberately, like Google unveiling a range of AI-powered advertising and commerce tools for marketers, designed to monetise new AI use cases, or Ford Motors announcing it would pivot its electric vehicle business to focus on battery storage for data centres.

Some seem more questionable, such as Bank of America rating UK catering and cleaning firm Compass Group as a foot into the theme on the grounds that all the construction workers building these data centres will need to be fed.

Others have somewhat accidentally become absorbed into it and embraced the opportunity.

US firm Caterpillar is one of the world’s largest manufacturers of construction equipment and was founded over 100 years ago, before the microchip was even invented. Caterpillar has now signed big contracts to build out these data centres, making AI a part of its long-term revenue stream.

But global active fund managers are becoming increasingly aware that portfolios could become overinvested in AI as a theme if they’re not careful, with so many companies attempting to hitch themselves to the ride, lessening portfolio diversification and therefore creating an unintended risk in the portfolio.

Julian Bishop, co-lead portfolio manager of the Brunner Investment Trust, aims for his portfolio to be an ‘all weather’ mandate. In other words, it isn’t aiming to shoot the lights out on a returns basis, but provide resilience during periods of volatility.

While the portfolio does have some “significant investments in AI and semiconductors”, via Taiwan Semiconductor (TSMC), ASML and Alphabet (Google), this makes up just 10%, making Brunner underweight what the manager now call “an uncomfortably large part of the benchmark”.

If the 30-40% of the holdings fell into the AI camp, as the S&P 500 index does at the moment, “that would be too much”, Bishop explained, because it’s adding a thematic risk to the portfolio.

This is the basic concept of diversification, which is seen as the ‘golden rule’ of investing for wealth creation and keenly, preservation, but the AI hype and fund flow into it has diluted that focus, some managers have argued.

Brunner sold out of US industrial stock Amphenol after one of its parts started being used by data centres, sending product demand soaring but also sending the business multiples up to heights Bishop felt could not be sustained and, was bringing too much AI into the trust.

Karen Ward, managing director and the EMEA chief market strategist at JP Morgan Asset Management, also flagged that with the spread of AI across sectors and geographies, investors will need to be wary of portfolios becoming overexposed, especially now that markets have “begun to accept” and that there will be some “AI losers”.

“We simply do not know at this stage how much AI is going to change the world and how much it's going to grow global nominal GDP. We don't know. I don't know, but neither does Bill Gates, neither does Sam Altman.

“We don’t know how the pie will be divided or how big it will be to start with,” Ward added.

If there was a sell-off akin to the 2025 DeepSeek or this year’s SaaSpocalypse, when billions were wiped off the value of various companies on AI related concerns, that creeping AI-portfolio exposure could hurt returns.

Where to look for some AI diversification

This diversification need is partly why JPMAM’s Ward has maintained her bullishness on Europe, even though the market and economy has taken a major hit due to the energy price spikes from the war in Iran.

Just over 50% of the US equity market is exposed to AI, according to JPMAM research, meanwhile Europe is around 15%.

This is why Brunner’s Bishop promotes becoming benchmark agnostic, especially around US and global equities, because they’ve long been exposed to one main theme (tech and now AI specifically).

“I think there comes a point at which the index is not a useful barometer...the benchmark is becoming fundamentally risky”, he said.

“There's a big difference between absolute risk and relative risk... people need to understand this idea that the index is not risk free, it's becoming fundamentally quite risky. It's all dependent on this one thing working out.”

The no AI winners winners

While few markets have kept up with the US long term, that doesn’t mean they’ve not made positive returns.

The STOXX Europe 600 – which covers 600 countries across 17 European markets – is up 23% over the past year, even with the Iran headwind, while the FTSE 100 made 23%, according to FE Analytics.

Another market currently lacking in AI-explicit stocks is India, which is part of the reason it wasn’t caught up in the recent emerging market equity boom.

This rally was centred around South Korea and Taiwan, the two hubs for AI stocks in Asia with Samsung, SK Hynix and TSMC listed here.

In AJ Bell’s latest Shares magazine, Mike Sell, head of global emerging market equities at Alquity Investment Management and manager on the firm’s dedicated Indian Subcontinent Fund, argued that the lack of AI stocks should be seen by investors as a reason to buy because it gives you thematic diversification while still accessing a major growth profile.

So while no one is denying that AI is a legitimate investment theme, it’s the latest version of checking that your whole portfolio isn’t chasing after one thing and leaving yourself exposed to potential pain later on.