Nick Markiewicz
Global equity markets delivered solid gains over the past year, rising 8.51% in the 12 months to 31 January 2026, supported by favourable economic conditions and continued investor enthusiasm for artificial intelligence-linked growth.
However, beneath the headline performance, market breadth has remained weak, a pattern that has persisted for several years. In the United States, the S&P 500 Equal Weight Index underperformed the market-cap weighted S&P 500 by nearly five percentage points, underscoring the extent to which returns continue to be driven by a small cluster of dominant mega-cap stocks.
The ten largest companies in the US equity market now account for roughly 40% of total market capitalisation, amplifying concerns around concentration risk.
“This concentration of returns has largely been a function of the unrelenting AI investment cycle,” said Nick Markiewicz, portfolio manager at the Ellerston Global Mid Small Cap Fund. “A relatively small number of mega-cap stocks have posted spectacular gains as their AI cloud businesses accelerate and drive revenues.”
Markiewicz noted that two key market developments have emerged in recent months, the first being a widening bifurcation between AI “winners” and “losers”.
On the winning side are businesses with either proprietary AI intellectual property or those leveraged to the surge in AI infrastructure spending.
US hyperscalers recently reported fourth-quarter earnings and sharply lifted their 2026 capital expenditure forecasts. Annual capex is now expected to exceed US$600 billion, up from US$450 billion projected only months earlier.
While the scale of spending is extraordinary, Markiewicz noted that it remains fully funded by operating cash flows.
“These companies still have innovative financing options available should they wish to push investment even harder through securitisation structures and bond issuance. Alphabet recently raised US$20 billion in new bonds, attracting more than US$100 billion in orders.”
A significant portion of this investment will flow into GPUs and data centre capacity, an area where Ellerston has positioned key holdings, including Nebius, Galaxy Digital, Core Scientific, GDS Holdings, and most recently Sharon AI.
“These companies all have one thing in common – a ready access to power,” Markiewicz said. “That remains in acute shortage and difficult to bring online quickly.”
Despite the strength of AI-linked equities, questions remain around whether customer demand can ultimately justify the massive infrastructure buildout.
The market has so far been sceptical about the AI ecosystem’s ability to organically fund itself. However, recent advances in AI model capabilities have renewed debate about the disruptive potential of AI.
A new Claude update from Anthropic in early January, followed shortly by OpenAI’s Codex update, significantly improved agentic coding capabilities. These advances allow autonomous AI agents to build software as well as connect directly with enterprise systems and perform structured tasks previously handled by third-party software platforms or highly skilled engineers.
The implications for SaaS business models have been profound, with investors reassessing competitive moats and long-term valuation assumptions.
Reflecting this shift, the Morgan Stanley US SaaS Index has fallen nearly 30% since December.
“While we are yet to form a confident view of the lasting impacts of agentic coding, the sell-off is a reminder of how quickly AI is developing. The market is aggressively re-pricing perceived AI losers in a shoot first, ask questions later manner,” Markiewicz said.
“We are also questioning whether markets may begin placing greater valuation premiums on businesses with difficult-to-replace tangible assets, which is a potential inversion of the past two decades, during which intangible-heavy firms have commanded expanding multiples.”
Outside AI, a second notable shift has been emerging in a change in market leadership.
Since the start of 2026, the Russell 2000 has begun to meaningfully outperform both the S&P 500 and the so-called “Magnificent Seven”, suggesting investors may be positioning for a broader economic recovery, seeking refuge from stretched mega-cap valuations.
“While still early, we believe this reflects a combination of improving cyclical expectations and growing investor caution around the declining quality of mega-cap cash flows as investment spending accelerates, or the beginning a rotation into businesses with less perceived AI revenue risk,” he said.
Ellerston Global Mid Small Cap ’s portfolio remains positioned to benefit from this theme, with cyclical exposures across the top end of holdings including Corpay, GFL, Clean Harbours, Nexans, MasTec and InterContinental Hotels Group.
“Despite strong trailing returns, the outlook for global equities through the remainder of FY26 remains highly uncertain. Trump’s policy direction has been described as erratic, equity markets are trading at record highs, and investors remain unforgiving of earnings disappointments.
“Offsetting these risks, inflation remains muted, industrial activity appears to be improving, and further rate cuts could provide support for short-cycle sectors,” he said.