Mark Barnes, PhD,
Indhu Raghavan, CFA,
- The AI theme has been a key driver of equity markets over the last three years and left Technology dominating the US large cap index. It has faced challenges related to expected payoffs and, recently, from AI-related disruption to business models, including in software.
- These emerging risks and expected volatility in the AI subset of the market may encourage investors to understand how the Tech concentration impacted market performance, and to look beyond Tech for opportunities going forward.
- US equity performance has broadened recently along two dimensions: market capitalization (to smaller stocks), and style (to more value-oriented stocks). This may provide indications of how to allocate beyond the recent tech market leaders.
Since the introduction of ChatGPT a little more than three years ago, the AI theme has been a key driver of equity markets and has left the Technology industry dominating the US large-cap index. The AI-driven tech rally, fueled by record capital investment by the so-called hyper-scalers, has faced challenges along the way, one of the first being China’s cheaper DeepSeek AI model release in early 2025 that threw into question the expected return on that investment. Newer concerns related to “circular” financing of AI firms and disruption across diverse sectors, particularly software, have since emerged.
This is not to suggest that the AI-driven tech rally is over, but rather that these emerging risks suggest more expected volatility in the AI subset of the market. This impels investors to understand the Tech concentration in the broad market and to look beyond Tech to see what other opportunities may be present, which we explore in this insight.
Exhibit 1 compares the cumulative performance of the Russell 1000 Technology industry with that of the Russell 1000 ex-Technology portion of the index, and notes three periods of weak Tech relative performance: post the DeepSeek AI model release in January 2025; the period since end-October when concerns about elevated Tech valuations, AI investment circularity and increased use of debt financing came to the forefront; and in early-February 2026 when Tech, particularly Software, fell sharply on fears of AI disruption, which is ultimately broader in scope that just Tech sectors.
Exhibit 1: Russell 1000 Technology and ex-Technology cumulative returns (USD, rebased 31 Dec 2024)
Source: FTSE Russell/LSEG. Data as of 5 February 2026. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Tech concentration
Tech has dominated US equity index weight and performance recently, especially at the larger end of the market-cap spectrum. Exhibit 2 shows the top 10 stock weights in several Russell indices, disaggregated into Tech and non-Tech components. For the Russell 1000 and Russell Top 200 we also highlight the weights of Amazon and Tesla, which are technically in the Consumer Discretionary industry, but are firmly entrenched in the AI ecosystem. Because of this weight concentration, Tech and related sectors and stocks have tended to dictate the performance of the large-cap indices recently.
Exhibit 2. Index weights of the largest 10 stocks, 31 Jan 2026
Source: FTSE Russell/LSEG. Data as of 31 January 2026. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Setting aside Tech’s index weights, it has also impacted large-cap indices disproportionately through its performance. Exhibit 3 shows the relative performance of Russell 1000 industries over Russell 2000 industries since January 2023. If large caps and small caps within the same industries behaved the same, we would expect that these lines would be relatively flat. But they are not. Large-cap Tech stocks outperformed small-cap Tech stocks by almost 80% in the last three years. Portfolios without large Tech exposure underperformed the broad index.
Exhibit 3. Russell 1000 / Russell 2000 industry relative performance (USD, rebased 31 Jan 2023).
Source: FTSE Russell/LSEG. Data as of 31 January 2026. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
To get an idea of how the indices would have behaved if we could limit the impact of Tech concentration, exhibit 4 compares the standard cap-weighted (CW) indices with hypothetical industry equal-weighted (EW ind) indices (in other words, using an equal-weighted average of returns across all industries). The gap between the top dark blue line (cap-weighted Russell 1000) and the light blue line (industry equal-weighted Russell 1000) shows the effect of the concentrated performance within the large-cap index. However, small caps did not see this dynamic. The cap-weighted and equal-weighted versions of the Russell 2000 ended the period at similar levels. Furthermore, the two Russell 2000 versions and the industry equal-weighted Russell 1000 index saw similar performance over this three-year period, underscoring once again the impact of large-cap Tech concentration. [note1]
Exhibit 4. Russell cap-weighted and industry equal-weighted cumulative returns (USD, TR, rebased 31 Jan 2023).
Source: FTSE Russell/LSEG. Data as of 31 January 2026. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Looking beyond Tech
The wobbles in the AI narrative do not suggest the end of the AI investment theme, but they may encourage investors to think about how US equity performance is broadening. We have seen this broadening recently along the market cap and style dimensions.
Firstly, along the market cap dimension, one important driver of small-cap relative performance is the interest rate environment. Small companies tend to have less diversified cash flows, weaker balance sheets, and worse access to capital. So, as interest rates decline, smaller companies tend to be helped more than larger companies, all else equal.
This pattern is captured in exhibit 5. In general, as the US 10-year yield declines, the Russell 1000’s performance relative to Russell 2000 tends to decline as well. However, recently, this pattern seems to have broken down. As yields have fallen gradually alongside the Fed rate cutting cycle, the outperformance of large caps has not reversed significantly. But, if we consider the relative performance of the industry equal-weighted indices, the historical pattern seems to have held up more closely. This suggests that if we abstract from the Tech concentration by using equal industry weights, the large-cap/small-cap dimension has been behaving in line with expectations. Given consensus views that US interest rates are still in restrictive territory, we would expect lower interest rates to be supportive of small caps’ relative performance.
Exhibit 5. Relative return of Russell 1000/Russell 2000 (CW and EW ind) and US 10-year yield
Source: FTSE Russell/LSEG. Data as of 31 January 2026. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Turning to the style dimension, exhibit 6 shows the performance of the Russell style indices over the last few months, showing both the period of AI skepticism starting in end-October as well as the disruption sell-off in February 2026. Recently there has been even more dispersion between the styles than the size dimension, with Russell 2000 Value outperforming others and Russell 1000 Value following closely behind. While both Growth indices suffered from the latest sell-off, the worst performing index was Russell 1000 Growth. This performance is reflective of investors’ search for value during the later stages of this equity bull market when US equity valuations are high relative to history. It is also reflective of other market drivers asserting themselves as the tech rally moderates and evolves. For example, the steepening US yield curve has been a tailwind for Financials, a typical bastion of value stocks. Similarly, as investors have sought to diversify within the AI theme, traditional value pockets of the market, such as Industrials and Utilities (specifically, Electricity), that are necessary for the AI build-out have benefitted.
Exhibit 6. Russell style indices cumulative performance (USD, TR, rebased 31 Oct 2025).
Source: FTSE Russell/LSEG. Data as of 5 February 2026. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Conclusion
The AI narrative is still alive, but the details have been challenged. The market has begun to exercise greater discretion regarding tech-related stock valuations and the expected winners and losers of the fast-unfolding technological developments (as discussed in this insight). Further, concerns around the codependence of AI-related companies for their funding and profitability have risen to the forefront. Given this, investors may be encouraged to think about what has been driving US equity performance beyond Tech, and how to allocate within the non-Tech portion of US equities. US equity performance has broadened recently along the size and style dimensions and may provide investors with an indication of trends to come.
Footnotes
[1] We discussed this in the January 2026 Russell US Indexes Spotlight report. | Back to Note 1
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