Artificial intelligence has been a dominant investment theme in global markets this year, but recent sharp swings in technology stocks have prompted strategists to warn investors against overconcentration. Last week saw one of the most volatile periods for AI-linked equities in months, driven by concerns over the sustainability of AI infrastructure spending, rising debt financing, and potential inflationary pressures from higher technology costs.
These fears rippled across global markets, triggering steep declines in several technology-heavy indexes before partial recoveries. South Korea's KOSPI index, which has nearly doubled this year, plunged as much as 10% in a single session last Tuesday before recouping some losses. It still ended the week down 7%, its steepest weekly drop since early March when geopolitical tensions over Iran unsettled markets. In the U.S., the Nasdaq Composite fell 2.2% last Tuesday and closed the week down 4.6%, with several AI-related stocks under pressure.
Although stronger-than-expected earnings from memory-chip maker Micron Technology briefly lifted sentiment on Wednesday, optimism faded after Apple announced price increases for iPads and MacBooks, citing rising memory and storage costs. Markets began July on a volatile note as well: Micron and SanDisk each fell more than 10% on Wednesday amid profit-taking, while Nvidia declined about 1.25%. The KOSPI again slumped over 7% on Thursday as volatility in South Korea's equity market persisted.
Crowded AI Positioning Raises Risks
Market strategists continue to view artificial intelligence as a key long-term investment theme. However, Charu Chanana, chief investment strategist at Saxo, noted that investors now face a different challenge. "AI is still one of the most important long-term investment themes in markets. But for investors, the question is no longer just whether AI will change the world. It is whether too much of their portfolio is now exposed to the same AI trade," she wrote.
Chanana highlighted that many of the market's strongest performers—including semiconductor companies, memory-chip makers, mega-cap technology firms, and AI infrastructure stocks—have attracted significant investor interest, making the trade increasingly crowded. "Some days, Nasdaq and semiconductor stocks rally sharply. Other days, one capex headline, margin concern or earnings disappointment can drag the whole trade lower," she said. This growing concentration has made technology stocks more vulnerable to sharp swings whenever investors reassess AI spending, valuations, or corporate earnings.
UBS Recommends Diversifying into Defensive Segments Within AI
UBS continues to favor companies supplying the infrastructure behind artificial intelligence, arguing that earnings momentum and demand remain supportive despite recent volatility. "We still favor the 'picks and shovels' of the AI buildout in our tactical positioning, as demand visibility, pricing power, and earnings momentum remain strong. But recent market volatility has also pointed to certain risks worth monitoring," the brokerage said.
UBS believes AI-related investments will remain a key driver of long-term equity performance but argued that investors should broaden their exposure instead of relying heavily on a handful of technology names. "For investors, we believe that exposure to AI-related stocks will remain a key differentiator for equity market performance over the long run, but we also believe diversification, both within and beyond AI, is essential," the firm said. UBS recommended considering more defensive segments within the AI ecosystem, including data center operators and selected payment companies. The brokerage also suggested complementing equity holdings with capital preservation strategies to help navigate periods of elevated volatility.
Saxo Lays Out Five Strategies to Manage AI Volatility
Chanana argued that investors do not need to abandon artificial intelligence altogether but should build "shock absorbers" into their portfolios to reduce dependence on a single investment theme. Her first recommendation is to rebalance positions that have become disproportionately large following the AI rally. "If AI, semiconductor or mega-cap tech exposure has grown too large after the rally, investors can trim it back to their intended portfolio weight. This is not a bearish call on AI. It is basic risk control. Rebalancing helps prevent one theme from hijacking the whole portfolio," she said.
She also recommended rotating part of portfolios toward defensive growth sectors such as healthcare and utilities, which can help portfolios behave better when AI volatility spikes. "These sectors have different earnings drivers from technology and may offer more resilience if the market starts questioning AI valuations or capex expectations," she noted. Another suggestion is to increase exposure to cheaper, non-AI earnings exposure. "Financials and selected materials offer exposure to parts of the market where valuations are lower and expectations are less stretched. These sectors do not replace AI, but they can help broaden the earnings base of a portfolio," she said.
Chanana further advised reducing concentration in mega-cap technology stocks by considering equal-weight equity strategies, limiting dependence on a small number of companies that increasingly dominate capitalization-weighted indexes. "Equal-weight equity exposure can keep investors invested in the market, while reducing reliance on the largest names," she explained. For more context on recent market moves, see Nvidia Slips Below $200 as AI Enthusiasm Shifts to Memory and CPU Plays and Tesla Stock Drops 3% Despite Record Deliveries: Profit-Taking and AI Focus Weigh.
This article is for informational purposes only and does not constitute financial advice.
