AI’s Expanding Market Grip Traps Active Managers on Wall Street

5uyc]x1r[}3181vvol1)})66_media_dl_2.png Bloomberg Intelligence

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(Bloomberg) — The AI boom is humbling the humans trying to navigate the markets it increasingly distorts.

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The effects are showing up everywhere at once. The artificial-intelligence era is adding to uncertainty around growth, inflation and borrowing needs. Company executives are under pressure to justify hiring while rivals automate — and the fast-narrowing equity rally is making diversification look like a handicap rather than a defense.

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The latest data show the challenge. What had briefly looked like a friendlier stretch for active investors earlier this year has quickly turned into punishment once more, with a narrow group of artificial-intelligence and mega-cap technology winners leaving most stock pickers behind.

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Nearly half of large-cap active equity mutual funds were beating the S&P 500 before the Iran conflict started, according to Bloomberg Intelligence’s Athanasios Psarofagis. As the war raged, investors rotated into technology and semiconductor stocks — sectors where active managers are typically underweight — and the outperformance evaporated. Just 25% of these funds remain ahead this year. 

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When the S&P 500 hit fresh records last week, fewer than half of stocks were trading above their 50-day moving averages, according to data compiled by Bloomberg, far below the historical norm when indexes reach new highs.

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The week only underscored how all-consuming the AI era has become. Bonds took fresh hits, while energy prices and geopolitical risks revived inflation fears. Yet risk assets held up, as Wall Street fixated on Nvidia Corp. earnings and the broader AI buildout — a sign that what began as a tech-sector boom is increasingly becoming the market’s dominant organizing narrative.

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“It is undeniably the case that a narrow subset of the market is driving risk and return these days,” said Matt Rowe, senior portfolio manager at Man Group. “Being under-allocated to names that have multiplicative return potential can be dangerous.” At the same time, “long equity managers need to have exposure to heavy weights in indexes that they are benchmarked to.”

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Pain for stock pickers comes as risk appetite proves resilient. Weekly jobless claims fell to 209,000, signaling a sturdy labor market, while Federal Reserve Governor Christopher Waller revived a debate over whether the next move could be a hike. Even so, animal spirits held up, with the S&P 500 notching its eighth straight weekly gain as credit stayed firm.

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The AI trade is no longer just another growth story lifting technology shares. It is increasingly functioning as a winner-take-all force, concentrating investment flows into a handful of companies and making it harder for diversified human judgment to compete unless managers are willing to crowd into the same names driving the benchmark ever higher.