Portfolio construction in the era of AI disruption

Key points:

• A “winner-takes-all” world: Leadership across markets and the economy has become increasingly concentrated, with a narrow group of companies and consumers now driving a disproportionate share of profits and spending.
• AI warrants selectivity: The dominant AI theme behind that concentration has entered a more discerning phase, with divergence, disruption risk, and greater scrutiny of margins and costs increasing the importance of security selection over broad exposure.
• Portfolio implications: With diversification under pressure and dispersion widening across markets and macro exposures, liquid alternatives can provide a complementary source of diversification and alpha within portfolios.

The consequences of a “winner-takes-all” world

The rise of AI has reinforced what we describe as a “winner-takes-all” dynamic across both the economy and financial markets. Investor portfolios have benefited from strong returns driven by robust profit and cash flow generation. However, those gains have coincided with rising concentration and diminished diversification, as a disproportionate share of growth has accrued to a small group of mega-cap companies that have been the primary beneficiaries of the AI revolution.

As shown in the first chart below, the top 20% of companies now account for more than 75% of total profits, up from 56% two decades ago. This concentration has propelled broad index returns and filtered through to the real economy via the wealth effect. The second chart shows that roughly 40% of total consumption is driven by the highest-income cohort, as asset appreciation reinforces spending among wealthier households and supports economic momentum. Additional support to growth has come from AI-related capital investment, alongside monetary easing and fiscal initiatives that have yet to fully filter through the economy.

In this “winner-takes-all” environment, headline measures of economic activity and equity performance reveal less about the dynamics unfolding beneath the surface, leaving portfolios increasingly dependent on a narrow set of outcomes.

That narrowing has also been visible in market breadth. Despite three consecutive years of double-digit returns for the S&P 500 Index, the share of companies outperforming the broad index remains below its long-term average, even as it has improved from recent lows in October 2025. Still-subdued breadth relative to headline index performance underscores how gains driven by the largest constituents can obscure broader differentiation across the market.

AI’s next phase: selectivity over broad exposure

That differentiation is increasingly evident within the AI trade itself. In recent months, leadership has evolved to reward companies further down the AI value chain and across regions, alongside growing scrutiny of competitive pressures elsewhere. In this environment, the rising tide of AI is no longer lifting all boats, as markets distinguish between structural beneficiaries and businesses with more fragile economics.

The chart below illustrates this shift following last April’s Liberation Day and the subsequent recovery, with widening performance gaps across distinct AI exposures. Investors have gravitated toward firms tied to the physical and operational backbone required to deploy AI at scale, with power- and infrastructure-related segments emerging as key leaders, while more vulnerable business models have lagged amid disruption concerns and questions around margin durability.

In 2026, software has emerged as one of the sectors most impacted as markets reprice AI-related risks. While hardware segments such as semiconductors have continued to benefit from infrastructure buildout, portions of the software ecosystem have faced greater scrutiny over their ability to sustain margins and free cash flow in a more competitive and capital-intensive environment. This repricing reflects a new phase of AI disruption, reshaping the opportunity set for investors and raising the premium on distinguishing between relative leaders and laggards across AI-exposed industries.

Portfolio construction in a concentrated and dispersed market

From a portfolio construction perspective, these dynamics present both structural challenges and new sources of opportunity. Elevated market concentration reduces the diversification benefits traditionally associated with exposure to broad market direction. When performance is dominated by a few companies, long-only portfolios become tethered to narrow outcomes, with a reduced ability for managers to express conviction across the broader market.

At the same time, the role of traditional bonds as a hedge to equity risk remains uncertain. Bonds rebounded in 2025, significantly outperforming cash for the first time in the post-COVID era. Monetary easing contributed to a steepening of the yield curve, supporting price gains in shorter maturities and shifting income opportunities slightly further out the curve. However, diversification from bonds has remained uneven. As the chart below shows, longer maturities have provided the weakest hedge to equity risk, as long-end yields are less anchored to policy rates and more influenced by forces including rising term premia and fiscal dynamics. This reinforces the importance of duration positioning—and the need for adding complementary sources of diversification within portfolios.

Against this backdrop, dispersion—or the widening differences in returns within and across markets—can create opportunities to generate returns that are independent of the direction of broad stock and bond markets. While we have highlighted dispersion within the AI theme and equity markets, it has also expanded at the macro level, with greater divergence across currencies, interest rates, and country equity markets, as shown below.

Liquid alternative strategies are designed to capture these relative opportunities. By taking long positions in forecasted leaders and short positions in anticipated laggards, they seek to generate returns from these performance differences. In doing so, they can provide complementary sources of alpha at a time when concentration remains elevated and traditional hedges have proven less reliable.

Evolving portfolios with liquid alternatives

Research from BlackRock’s Investment and Portfolio Solutions team shows that only 35% of advisor-managed portfolios currently allocate to alternatives, leaving meaningful room to broaden return drivers beyond traditional stock and bond exposure.¹ As concentration and differentiation reshape market dynamics, incorporating strategies designed to capitalize on today’s dispersion can help strengthen portfolio diversification and return potential.