With the stunning performance of AI-related stocks driving the stock market, investors are questioning how their portfolios might be affected by a reversal in the AI investment theme – and what, if anything, they should be doing about it. 

To answer those questions, let’s first define the AI market.  We start with a group of companies commonly referred to as the Magnificent 7: Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia & Tesla.  We add three other names – Broadcom, Micron Technology and Taiwan Semiconductor – to arrive at ten companies that, taken together, largely reflect the direct AI market set. 

Market Concentration

To get a sense of how a portfolio might be impacted by a downturn in AI-related stocks, we first look at the market concentration of these ten companies as a percentage of the U.S. market.  

Using the S&P 500 as a proxy for the U.S. market we can see that the concentration of these AI-related stocks is currently close to 40% of the market.  Note: this market concentration estimate likely represents a floor as there are many additional companies with varying levels of AI exposure.

The table below shows the details of these company’s market weights in the S&P 500

Market Weights of Mag 7 +

As of 8/28/26

Why do we think this is important?

They say history doesn’t repeat, but it often rhymes.  There is no way to confidently predict the future, but we can be informed by similar experiences in the past. 

During the Dot-Com era in the late 1990s, the “picks & shovels” companies were the telecom firms.  Some of the highfliers of the time, with their 1999 returns, included Level 3 Communications (90%), Nextel Communications (337%), Metromedia Fiber (186%), Exodus Communications (1,006%) and Global Crossing (122%). 

As the chart below shows, none of the top telecom firms outperformed the S&P 500 over the subsequent time frames and even more telling, today, only one of the top twenty firms continues to exist in the same corporate structure.

What should investors do?

The concentration risk posed by AI-related companies doesn’t fundamentally change the challenge faced by investors.  Equity risk is always present.  If it weren’t, the expected return on stocks would be the same as the expected return on a bank savings account.

The pertinent question is how that ever-present equity risk is managed.

Managing that risk is a fundamental part of Fifth Set’s investment philosophy.  Guided by findings from academic research, our portfolios are “tilted” towards small, value and international stocks.

The table below shows the same set of stocks with their representative weights in the portfolio.  This approach reduces the portfolio’s exposure to AI-related stocks to about one third of the level in the S&P 500.

These “tilts” are always part of Fifth Set portfolios. As a result, the diversification we seek is consistently applied rather than implemented in response to a particular market trend.  This disciplined approach is designed to help mitigate equity risks such as the sector concentration resulting from the current AI investment theme.

Fifth Set Private Wealth Management – Taxable Equity Model

Note: As of 8/28/26 – FSPWM taxable equity model composed of 50% DFA US Core Equity 2 (DFAC), 35% DFA International Core Equity (DFIC), 12% DFA Emerging Market Core Equity (DFEM) and 3% Vanguard Real Estate (VNQ)