A trader works on the floor of the New York Stock Exchange in New York on Oct. 12. Markets anticipate a busy week ahead of earnings results and inflation data.UPI/YONHAP
Choy Jung-hyuck
The author is a professor of economics, finance and asset management at Hanyang Cyber University.
Despite sharp increases in interest rates and oil prices, the U.S. S&P 500 index has remained resilient, near record highs. Beneath the surface, however, the picture is less encouraging.
According to Goldman Sachs, the median S&P 500 constituent was trading 16 percent below its 52-week high at the end of September. Although the overall index remained close to its peak, many individual stocks had already undergone substantial corrections. Strong performances by a handful of large companies were masking broader market weakness.
Artificial intelligence is the principal force supporting the index. JPMorgan reported that the 10 largest companies accounted for 40.6 percent of the S&P 500's total market capitalization at the end of September. Including businesses across AI-related industries, such as semiconductors, cloud computing, software and electricity, raised that proportion to 53.2 percent.
Another important development concerns valuations. The index's forward 12-month price-to-earnings ratio, or PER, declined 14 percent, from 22 at the end of last year to 19 in September.
The ratio measures stock prices against expected corporate earnings over the following year. Its decline suggests that earnings forecasts improved faster than share prices. Rising interest rates, higher oil prices and uncertainty over returns on AI investment have restrained further market gains.
Concentration risk is even more pronounced in Korea's stock market.
Unlike the United States, where AI-related businesses span semiconductor design, cloud services and other activities, Korea relies heavily on memory chips. This leaves the domestic market particularly exposed to fluctuations in semiconductor demand and prices.
According to the Korea Financial Investment Association, Samsung Electronics and SK hynix together accounted for an average 52.8 percent of the Kospi's market capitalization in September. A correction in either company's shares could therefore have substantial consequences for the entire market.
Addressing this risk requires a more sophisticated understanding of diversification.
Investors traditionally diversify by holding numerous stocks across different industries. But the number of holdings matters less than the economic forces driving their earnings. A portfolio containing dozens of companies may still be heavily concentrated if most depend on the same AI investment cycle.
Past market movements offer useful lessons. During the DeepSeek shock in January last year and the technology stock correction in July this year, low-volatility and high-dividend stocks performed relatively well.
These companies generally experience smaller price fluctuations or distribute a larger proportion of profits to shareholders, making them potential alternatives when technology shares come under pressure.
In 2022, when interest rates surged, the S&P 500 fell 18.1 percent, while the Invesco S&P 500 High Dividend Low Volatility ETF, known as SPHD, gained 0.6 percent. Exchange-traded funds, or ETFs, allow investors to hold baskets of securities through a single investment product.
Such strategies are not without drawbacks. When technology stocks rebounded strongly in 2023, SPHD significantly underperformed the broader market.
Goldman Sachs introduced an S&P 500 index excluding AI-related companies, known as SPXXAI, in February. Rather than betting against AI, the index offers exposure to businesses whose earnings depend on different economic drivers.
The objective is not to abandon AI's growth potential but to reduce excessive reliance on a single investment theme.
Investors confident in AI's long-term prospects should therefore prepare for short-term corrections without sacrificing opportunities for growth. By combining AI holdings with companies supported by independent sources of earnings, they can reduce concentration risk while remaining positioned to benefit from technological progress over time.
This approach also requires recognizing that diversification cannot eliminate market losses. Different assets may decline together during periods of financial stress. Nevertheless, spreading investments across companies with distinct earnings drivers can help limit the damage caused by a downturn in any one sector. The central question is therefore not simply how many stocks an investor owns, but whether those holdings provide genuinely different sources of risk and return over time and across market cycles.
This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
