How AI Megacaps Are Creating Investment Opportunities

Communication marketing for professional investors only

On June 19th, 2024 Nvidia became the world’s most valuable company. Its rise has been stunning, up 181 percent so far in 2024 and taking only three months to add dollar billion in market capitalisation¹. While some of the other US-based megacap tech stocks have also seen impressive share price rises this year – Meta +44 percent, Alphabet +26 percent, Microsoft +20 percent² - Nvidia’s explosive growth has left them looking like laggards.

While most investors’ attention has been drawn to individual stocks, the incredible growth of these very large companies has also driven significant increases in indices that contain these names, including the S&P500, the Nasdaq, and the global MSCI indexes.

Large Cap Indices Are Increasingly Concentrated

The incredible success of megacap tech has also led to the large-cap indices becoming increasingly concentrated in technology. In 2014, the technology concentration of all three indices (S&P 500, Global large caps, and Global SMIDs) was reasonably similar, however now in May 2024 technology makes up more than 30 percent of the S&P 500 and 25 percent of the global large-cap index.

The global SMID index has stayed relatively consistent, rising from 12 percent to 14 percent. The increased concentration of the large-cap indices is a concern for investors who prize diversification as a way of decreasing risk and reducing the volatility of their investment returns.

The SMID index remains more diversified than the large-cap index, and of course, active managers can construct portfolios that are better diversified than the index through considered stock selection.

Can Large Caps Continue to Outperform?

This is the key question for investors. According to Vaughan Nelson Portfolio Manager James Eisenman: «Large-cap names have been largely driven by the excitement around AI, while the tangible benefits of implementing the technology have yet to be seen.

If AI is over-hyped and needs time to mature as a technology, then large-cap tech could give back some of its recent outperformance. However, if new use cases are developed quickly then the tangible benefits of AI could provide an outsized benefit to small companies by allowing them to scale their operations more efficiently as they grow.»

While the question of whether large cap outperformance will continue can only be answered in the future, James Eisenman thinks all investors should be aware of, and adjust to, the new market dynamics. «Due to the incredible success of the AI-related megacaps the stock market has changed significantly in a short period and all investors should be looking at their investment portfolios and deciding whether they need to adjust or rebalance them to align with their investment plans.

These market movements have also created great opportunities for active managers and stock pickers to outperform their benchmarks over the long-term. Any big market changes are opportunities that active managers and astute investors can capitalize on.

This year we have been able to open positions in companies that will benefit from the success and growth of AI, but are trading at much lower multiples.»

Written in July 2024

¹Reuters, 19 June, 2024. ‘Nvidia becomes world’s most valuable company’
²Stats as of 19 June

Additional Notes
Marketing Communication. For professional investors only. Past performance is not indicative of future results. All investments involve risk, including the risk of capital loss. The provision of this material and/or reference to specific securities, sectors, or markets within this material does not constitute investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of services. Investors should consider the investment objectives, risks and expenses of any investment carefully before investing. The analyses, opinions, and certain of the investment themes and processes referenced herein represent the views of the portfolio manager(s) as of the date indicated. These, as well as the portfolio holdings and characteristics shown, are subject to change. There can be no assurance that developments will transpire as may be forecasted in this material. In Switzerland: This material is provided by Natixis Investment Managers, Switzerland Sàrl, Rue du Vieux Collège 10, 1204 Geneva, Switzerland or its representative office in Zurich, Schweizergasse 6, 8001 Zürich.

NATIXIS INVESTMENT MANAGERS Paris 453 952 681 Capital : 178 251 690 € 43, avenue Pierre Mendès-France, 75013 Paris www.im.natixis.com

Vaughan Nelson Investment Management, L.P., a subsidiary of Natixis Investment Managers S.A., is an investment adviser registered with the U.S. Securities and Exchange Commission (IARD No. 106975) and is authorized to provide investment management service