Founder and chief investment officer John Hock told InvestorDaily the US stock market is now approximately 238 per cent the size of the US economy.
“That’s an all-time high market cap to GDP. Those largest 10 stocks represent something like 37/38 per cent of the US stock market – huge degree of concentration of circularity in the stock market.”
Currently, the US accounts for 65 per cent of the global stock market, while its economy represents just 27 per cent of global gross domestic product (GDP).
“About 70 per cent of the US economy is driven by consumer consumption. More than half of that consumption is being driven by the wealthiest 10 per cent of Americans – with super concentration at the top 1 per cent.”
This concentration means both the economy and the stock market depend heavily on a small, affluent segment of the population and a few highly valued companies – especially those tied to the AI boom.
For example, this week saw chip manufacturer Nvidia become the first company to hit US$5 trillion in market value, having benefited from its products being used to power AI technology.
Hock said: “What you have is economies and stock markets hinging on a very small number of wealthy Americans and a very small number of highly valued, concentrated stocks,” he said.
“It also means that economies are much more sensitive to stock markets than perhaps ever before.”
The main risks include confidence and the wealth effect, with spending by the wealthy depending on stock prices staying high. On the other hand, a loss of confidence, he warned, could slow consumption.
“It means there’s a lot hinging on confidence … Where’s that confidence coming from? It comes from the wealth effect. The fact that those stocks keep going up, people are feeling wealthier and they spend more.”
Investors are urged to stay diversified, resist “fear of missing out” and avoid concentrating capital in overvalued sectors.
“Each dollar that was invested outside of the index, with hindsight, should have been invested in the index,” he said.
Is this bubble territory?
Hock warned that this cycle resembles past innovation-driven booms, where concentration and optimism peak before corrections.
“[There are] clear parallels to every major period of innovation. Just when everyone has that feeling of missing out, it’s more important than ever to diversify. Doesn’t mean take all your chips off the table – it means don’t have all your eggs in one basket.”
Reflecting on the invention of the light bulb, railroads and the dotcom bubble, Hock highlighted the pattern of early innovators driving enthusiasm before valuations reset.
“They get over-inflated out of that enthusiasm, out of the narrative, out of the emotion, out of the fear of missing out. But invariably, those technologies become diffused across the economy and society benefits, other companies benefit, you and I, the consumer benefit,” he said.
In recent weeks, interviews with Jeff Bezos and others have highlighted a shared acknowledgment that the current market is clearly in a bubble. Hock thinks there will inevitably be both winners and losers in this situation.
“The good thing about this bubble is society will likely benefit if we manage it properly. There will be big winners, big losers among certain companies.”
Hock said that while big tech firms are heavily investing in AI and capital expenditures, most companies aren’t yet seeing returns.
“The true revenue benefits will likely come longer term. In some businesses it’s going to take years and other businesses might say, probably a 24–48 month window.”
AI expansion requires massive energy use, raising both costs and environmental concerns.
Hock believes rising energy prices could hurt consumers and become a political flashpoint in upcoming US elections.
“We do not have the energy needed to satisfy the investment that these people are embarking on – and that’s a huge deal because it has to be met and hopefully in environmentally friendly ways, but it also comes at a cost.”
When it comes to finding new opportunities, he noted the global order is shifting from a bipolar world of clear alliances to a multipolar landscape shaped by new powers where uncertainty has become the new constant and a higher risk premium is required.
“The world is a less safe place than it was in many ways – it’s forcing companies to adapt,” he said.
“From a mathematical perspective, it’s much more negative to say financial productivity, returns on equity per share or incremental returns on invested capital or asset turnover, but it leads to perhaps more resilient supply chains.”
Hock also noted that many companies became overly aggressive in the aftermath of COVID-19, passing on or even inflating price increases.
“I think one of the big trends you’re going to see going forward is a lot of price cutting and margin compression because consumers and businesses are either not able or not willing to pay the prices.”
Hock sees investment opportunities across all regions and sectors, emphasising that success is highly company-specific. While many of their holdings are in European-headquartered firms that operate globally, he highlighted Japan as an underappreciated market.
“Cheap doesn’t mean undervalued unless the financial productivity or profitability of the business is growing. On top of that, you’re seeing massive private equity flow into Japan, recognising the same thing that we’re identifying.”
Emerging markets are also on Altrinsic’s radar.
“Not too many months ago you got ridiculed for mentioning an emerging market or China. In the US, many people would consider China uninvestable. Usually when that occurs is when it’s pretty timely to start considering investment, because there’s a lot of negative emotion around it.”
