Markets may still be performing well, but the narrow concentration in technology stocks reveals a soft underbelly to the current bull run. For the rally to sustain, rate cuts will need to encourage broader participation across sectors. The continued strength in gold, even as equities hit new highs and bond yields remain subdued, signals caution is warranted. It suggests that investors remain circumspect beneath the surface, and that confidence in the breadth and durability of this market cycle is far from universal.
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Not So Good US Inflation Data…
US inflation data for August was marginally stronger than expected, reinforcing the view that price pressures remain sticky and complicating the outlook for monetary policy. Headline CPI rose 0.4% month-on-month and 2.9% year-on-year in August, slightly above consensus expectations, while core CPI edged up 0.3% on the month, keeping the annual core inflation rate steady at 3.1%. Although the upside surprise was modest, it was significant enough to temper expectations of a smooth disinflation path.
Chart 1: US Inflation and Household Expectations for 5 year Inflation (%)
Source: Bloomberg
Compounding the challenge further for the Federal Reserve was the latest University of Michigan consumer sentiment survey, which showed a sharp rise in long-term inflation expectations. The five-year inflation expectation jumped to 3.9% from 3.5% previously, marking its highest level since 2011. This deterioration in inflation psychology raises the risk that inflation will become more entrenched and may limit the Fed’s ability to ease policy without reigniting price instability.
Fed still has scope to cut rates, however…
The Federal Reserve is expected to cut interest rates by 25 basis points when it meets this week. The move has been necessitated more by the weakness in the labour market than by confidence in falling inflation. Job growth has slowed, and unemployment has ticked higher. Inflation, especially core, remains stubbornly high. In any case, the markets’ focus this week will also be on the dot plot and how individual members vote. Given the times, divisions may appear between cautious and dovish voices. Chairman Jerome Powell will likely stress once again that the Fed is data-dependent, but may avoid offering any firm commitment to more cuts. Further easing will hinge on clear signs that inflation is falling in a sustained way.
Tech Dominance and US Equity Market Concentration
The outperformance of the technology sector has been the defining theme of 2025. The strength in tech stocks once again is pushing market concentration to levels not seen in decades, raising structural concerns about the breadth and sustainability of the rally. The top ten companies in the S&P 500 now account for 40% of the index’s total market capitalisation, up sharply from just 17% in 2015. This concentration is more than a statistical curiosity—it has profound implications for how the index behaves and how returns are distributed.
Chart 2: Weighting of the Largest Ten Companies in the S&P500
Source: Bloomberg
That concentration is clearly reflected in relative performance. The equally weighted S&P 500 index has delivered only around half the Total Ridge total return of the market cap weighted index over the past two years, highlighting how narrow the leadership truly is open brackets see chart 3 close brackets. Most of the performance has been driven by a handful of mega cap tech names. What’s particularly striking is that nine of the top ten stocks in the index and now technology companies with Berkshire Hathaway the sole non tech name among them. By contrast the top ten in 2015 included only two tech companies Apple and Microsoft.
Oracle’s 36% single-day gain last week exemplifies the speculative fervour that continues to surround large-cap tech. For the industry’s lofty valuations and ambitious AI narratives to hold ground, the technology must find widespread, productive application across the broader economy. So far, there is little evidence that this is occurring at scale. The risk is clear: if the tech sector fails to deliver on these expectations or faces valuation compression, the broader market could struggle given its extreme dependence on a narrow set of names.
Chart 3: S&P500 Equally Weighted Index Underperforms the S&P500
Source: Bloomberg
The sector’s dominance and, by implication, the support it provides to capital expenditures (capex) in the economy has been a key element of why growth has held up well. Capital investment trends in 2025 are increasingly being shaped by the global demand for advanced technologies, with data centres emerging as a critical focus. Both Japan and the United States are leading this shift, reflecting their growing dominance – and higher investments – in high-tech infrastructure. In the US, capex in data centre construction has surged—rising approximately 30% year-on-year, (investment of $40b in data centres in June 2025 alone), driven by the exponential demand for AI training and cloud computing capacity. This boom is transforming the real estate and utilities markets, with significant spillovers into semiconductor and power infrastructure sectors.
Japan, meanwhile, is also experiencing a powerful upswing in technology-related capital investment.
Corporate capex has accelerated, led by manufacturing and digital infrastructure, with government incentives further supporting high-end semiconductor and data projects. These trends highlight a strategic pivot: in both countries, capex is no longer primarily cyclical but increasingly focused on long-horizon technology transformation themes. Europe, by contrast, appears to be lagging in this regard, with fewer large-scale tech investments and a slower response to AI infrastructure needs.
Capital Investment: Strong, Well‑Financed, but Narrowly Focused
The Global capital investment’s growth has had a narrow focus. Venture capital (VC) funding hit abut $126 billion in Q1 2025, up from roughly $118.7 billion in the prior quarter, marking a ten-quarter high. Deal count, however, fell. There were only approximately 7,550VC deals in Q1, down from 8,800 in late 2024. Much of the upside has been driven by very large financing rounds in tech heavy sectors, especially artificial intelligence. In fact, over 50% of all global VC dollars in the first half of 2025 were invested in AI related companies; In the US the figure rises closer to 60 65%.
Despite this robust capital flow investments are increasingly concentrated: handful of large companies attract the lion’s share of funding, while many smaller scale deals and non tech sectors like behind corporate venture arms and late stage rounds are dominating the totals while seed and early stage deal volumes shrink. In some capital is plentiful but its deployment is skewed towards tech and the few firms with access to large rounds.
The US consumer may struggle to support growth even with lower interest rates.
Consumer debt levels in the United States have reached historic highs, underscoring growing financial stress across households. Total outstanding credit card balances now stand at a record $1.21 trillion, with delinquency rates rising steadily over the past year. The increase in delinquency rates is most pronounced among younger borrowers and lower-income households, where higher interest rates are biting hardest. Auto loan delinquencies have also crept higher, while student loan repayments—now fully resumed—are adding fresh pressure to disposable incomes. Mortgage debt remains the largest single component of consumer debt, but with home purchases slowing and refinancing largely frozen due to high rates, new credit formation in housing has stalled. Despite still-low unemployment, the accumulation of high-cost debt is constraining consumer spending, which is already showing signs of fatigue in retail and discretionary categories.
Oh La La!
France is now confronting fresh strains in its sovereign finances after Fitch downgraded its long‑term credit rating to “A+” from “AA‑” — the lowest level ever assigned by the agency. The downgrade reflects deepening concerns about France’s ballooning public debt, political instability, and the limited means at the government’s disposal to manoeuvre in the face of economic shocks. Adding to the pressure, newly elected Prime Minister Sébastien Lecornu has already reversed several austerity proposals, including cuts to public holidays, in a bid to calm unrest. Meanwhile, French corporate borrowing costs have in some cases dropped below those of the sovereign, a rare inversion driven by investor anxiety over government credit risk and signs that France’s fiscal situation may deteriorate further unless serious reforms are adopted.
Chart 4: France’s 10-year Government Bond Yield
Source: Bloomberg
Containment of Market Impact of Japan’s Political Fall-out
The political upheaval in Japan has had a modest but noticeable impact on domestic asset markets. The Nikkei 225 fell slightly in the days following Prime Minister Ishiba’s resignation, as investors assessed the risk of policy disruption and uncertainty around the upcoming LDP leadership contest. The index held up relatively well, suggesting markets are not pricing in a major policy shift yet, but volatility has increased, particularly in sectors exposed to fiscal policy and government contracts.
In the bond market, yields on Japanese government bonds edged higher amid speculation that political instability could complicate efforts to manage Japan’s heavy debt burden and delay structural reforms. The JPY, meanwhile, weakened modestly, reflecting both political uncertainty and persistent divergence in monetary policy between the Bank of Japan and other major central banks. Investors are watching closely for any signal that a new government might push for changes in fiscal stimulus, trade policy, or even BoJ coordination—all of which could reshape sentiment toward Japanese equities and debt.
Gary Dugan – Investment Committee Member
Bill O’Neill – Non-Executive Director & Investor Committee Chairman
15th September 2025
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