Market concentration

July illustrated the risks associated with the benchmark's increasingly narrow leadership, as a pullback in AI-related stocks weighed heavily on overall index performance.

Generation Investment Management Global Equity Quarterly Investor Letter July 2026 In this quarterly letter, we review a challenging period shaped by AI-driven market concentration and discuss why we see a compelling opportunity for long-term investors ahead.

By the second quarter, leadership had shifted again: the Magnificent Seven lagged amid growing scepticism over future returns on AI capital expenditure, while Financials, Industrials and Healthcare led a broadening in market performance.

This narrow leadership has been a defining feature of performance over the year so far; in Q2, these same three names accounted for 63% of the benchmark’s total return, while year-to-date they have contributed more than 78%.

FIGURE 2: THE BUBBLE HISTORY OF STOCK MARKET CONCENTRATION, MEASURED AS A % OF US MARKET CAP AI optimism meets risk management We are not AI doomers.

The Magnificent Seven materially underperformed the rest of the market, partly as investor scepticism grew over near-term AI monetisation.

The Magnificent Seven materially underperformed the rest of the market, partly as investor scepticism grew over near-term AI capex monetisation.

In this commentary, we discuss the implications of the changing macroeconomic outlook, current levels of index concentration, and the recent strength of the semiconductor sector.

This strength in equities has also brought market concentration back into focus.

This market concentration is arguably defensible on fundamentals: the S&P 500 posted one of its strongest quarterly earnings results in five years, driven largely by the Magnificent Seven, which reported blended earnings growth of more than 60%, well above the low double-digit growth recorded by the rest of the Index.

This market concentration is arguably defensible on fundamentals: the S&P 500 posted one of its strongest quarterly earnings results in five years, driven largely by the Magnificent Seven, which reported blended earnings growth of more than 60%, well above the low double-digit growth recorded by the rest of the Benchmark.

The attribution shows that the market has shifted from one form of narrow leadership to another: from the Magnificent Seven in 2023 and 2024 to semiconductors and memory today.

Historically, index concentration of this magnitude has marked a key inflection point, triggering a market rotation from Large Cap to Small Cap equities.

With record market concentration despite uncertainty introduced by profound technological change, diversification is paramount.

Portfolio Construction in a Concentrated Index Environment Index concentration has reached extreme levels.

To address the market concentration in the IT sector, and the strong prospect that the IT sector will continue to be a rich source of high-quality, durable-growth companies in the future, we raised the IT sector limit from 30% to the higher of 35% or the index sector weight.

AI’s creative destruction does not just threaten jobs, it threatens the publicly traded Magnificent Seven, or Mag 7.5 There is now also a private version: Open AI, Anthropic, xAI, Stripe, Databricks, and Andurill.6 5 The Magnificent Seven is the financial market vernacular for the extraordinarily successful IT/AI companies Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.

The Canadian 10-year yield declined nine bps to 3.38%, while the U.S. 10- year Treasury yield rose 15 bps to 4.47%, leaving equity markets to CLEARBRIDGE CANADIAN EQUITY STRATEGY 2 balance capex visibility and nominal growth pockets against valuation risk, narrow leadership and persistent inflation uncertainty.

State of the market For years we have lived in a market dominated by “the Magnificent Seven”: Google, Apple, Amazon, Facebook/Meta, Microsoft, Nvidia and Tesla.

AI infrastructure investment remained a powerful structural driver, supporting capital flows into semiconductors, data center infrastructure and related industries, even as investors rotated away from some of the Magnificent Seven.

Our team has invested through many different EM cycles, and we know each period of market concentration can feel distinct in the moment.

The Russell rebalance substantially reduced the weighting of the Magnificent Seven in the Russell 1000 Growth Index (RLG), with Apple, Microsoft and Amazon shifting toward the Russell 1000 Value Index while Alphabet’s weight increased (Exhibit 1).

Index concentration, valuation dispersion and the market’s willingness to extrapolate dominant narratives have created an environment where we observe plenty of the behavioral extremes the strategy looks to exploit.

With a 15% YTD return, Alphabet is the best performing company among the Magnificent Seven.

Outlook Looking ahead, the market appears to be broadening beyond the narrow leadership that defined parts of the first half.

We continue to be mindful of market concentration risk and believe our investment process offers ways for us to manage this while maintaining dedicated exposure to secular AI growth trends.

While US based AI-related companies drove market returns during the quarter, we were heartened to see the advance broadened well beyond the “Magnificent Seven” to include smaller capitalization companies.

Market Concentration Risk (Geographical Region/Country) Investing in a particular country or geographic region can cause the value of this investment to rise or fall more relative to investments whose focus is spread more globally in nature.

The Magnificent Seven was all the rage in 2025 and AI/technology stocks were the primary drivers of market performance in the first half of 2026.

Investor sentiment toward hyperscalers has deteriorated, and the seven major tech companies that have led the U.S. market in recent years—the so-called Magnificent Seven—have failed to outperform the equally weighted S&P 500 over the past twelve months.

And we even got a rebalancing of market favorites over this quarter: mega-cap tech companies, ala the ‘Magnificent Seven’, did poorly.

Earlier this year Bank of America notes that the “AI Big Ten” – the Magnificent Seven plus Broadcom, AMD, and Micron – represented roughly 40% of the total U.S. market capitalization.

Layered on top of historic index concentration and valuations requiring near-flawless execution, the cumulative case for discipline is hard to ignore.

We particularly like the contrast with the so called Magnificent Seven, where we now have virtually no exposure on valuation grounds.

The “Magnificent Seven” were less dominant, with four of the seven underperforming during the period, creating a healthier backdrop for active management and stock selection.

The Magnificent Seven is a term used to describe the technology oriented, highly influential companies of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.

The Magnificent Seven is a term used to describe the technology-oriented, highly influential companies of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.

Initiating a position in NVIDIA at this stage—particularly after not previously owning one of the “Magnificent Seven”—warrants explanation.

Magnificent Seven stocks: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla.