On only a few occasions over the past two centuries has the U.S. stock market been so heavily concentrated in a small number of publicly traded companies, attracting capital and investor interest.In the 1960s, AT&T’s stock accounted for about 10% of the S&P 500 index. That share rose to 35% when combined with 5–6 other companies. Today, the eight largest companies account for nearly 40% of the same index, based on data as of the end of June this year. We are referring to NVIDIA, Alphabet, Apple, Microsoft, Amazon, Broadcom, Tesla, and Meta Platforms, whose stocks closed with losses that same month.
Other periods when the market exhibited such high concentration were the railroad era, the “Nifty-Fifty” era, the Japanese bubble, the internet boom, and the current artificial intelligence (AI) boom.
They say that the greatest investment risks don’t arise when the narrative is wrong, but when everyone already believes it. Perhaps this is happening today, though that doesn’t mean AI technology is a bubble. Nor does it mean that large companies have no value.
Internet technology has changed the way we communicate and do business. AI could prove to be just as—or even more—impactful.
However, sometimes investors’ enthusiasm and expectations “get ahead of themselves,” making them more vulnerable to potential disappointments. Apollo gave us an idea by updating the chart below on the free cash flow of the major tech companies (hyperscalers)—Alphabet, Microsoft, Amazon, Meta, and Oracle—over the next 12 months. Free cash flow refers to the cash remaining with a company after capital expenditures are deducted from its operating activities. Unlike accounting profits, which are affected by non-cash items such as depreciation, free cash flow reflects the actual cash on hand.
According to Apollo, the net cash flows of the above companies, which peaked at $300 billion toward the end of 2024, have plummeted to nearly $40 billion, marking a decline of about 40%. In fact, the sharpest decline has occurred in recent months. Oracle’s free cash flow has already turned negative, while Amazon’s has fallen to nearly zero.
These companies, which are leading the race to invest in AI by pouring in massive amounts of money, are seeing their free cash flows collapse while investors pay very high valuations to buy their shares. The expectation is that today’s investments will translate into large future cash flows. But what if their expectations are dashed, as has happened in the past with other technologies?
It wouldn’t be unusual. In fact, the next stock market crisis could strike the next time it becomes clear that free cash flows aren’t sufficient to fund major investments in AI.
