(The opinions expressed here are those of the author, a

columnist for Reuters.)

By Jamie McGeever

ORLANDO, Florida, May 11 (Reuters) - As the artificial

intelligence boom accelerates, stock market concentration is

reaching historic proportions - and not just in the U.S. where

tech megacaps like Nvidia ( NVDA ) and Alphabet

dominate. Increasingly, top-heavy indices are a feature of

global equity markets, not a bug.

The rise of the "Magnificent Seven" U.S. tech giants has

amplified equity market concentration. The top 10 U.S. stocks

currently account for 33% of the overall market's value,

according to Morgan Stanley analysts, and 37.5% of the MSCI USA

index.

It's even more extreme in some other tech-heavy markets. The

top single stocks in South Korea and Taiwan - Samsung

and TSMC - account for around 20% and 40%,

respectively, of their benchmark indexes, Morgan Stanley figures

show. In fact, these two companies alone account for a fifth of

the entire MSCI Emerging Markets Index, which

covers 24 countries.

So should investors be worried? It depends.

On the one hand, market concentration can help lift all

boats on the way up, as we are seeing today. Average annualized

U.S. equity returns in times of increasing concentration since

1950 have been notably higher than during periods of declining

concentration, Morgan Stanley's team notes.

But it's the down leg that matters.

The current period of concentration is mostly tied to one

theme: AI. This means the S&P 500 and Nasdaq -

and a growing number of indices in Asia - have essentially

become directional bets on the success of this nascent

technology.

In turn, if earnings and guidance from just a few tech

giants fall short of expectations, the top-down drawdown could

be as indiscriminate as the rally, potentially turning into a

disorderly rout, as battle-scarred investors know all too well.

And given sky-high AI expectations, a market correction need

not require AI to flop. The technology simply needs to be less

revolutionary than expected.

"PASSIVE CONCENTRATION TRAP"

If that occurs, where is the offset?

Investors in an S&P 500 index fund may think they are

diversified, but this is mostly an illusion. As RBC Wealth

Management analysts note, more than $40 of every $100 invested

goes into just 10 companies. This "passive concentration trap"

creates a feedback loop where fund inflows lift the biggest

stocks and increase their weights, regardless of whether their

fundamentals justify it.

Perhaps an inflection point is near. Analysts at RBC note

that the market-cap-weighted S&P 500 is outperforming its

equal-weighted counterpart by more than 30%, a historically wide

margin.

"This evolution requires a recalibration of assumptions,"

they wrote earlier this year. "The index has been a resilient

benchmark, but its top-heavy structure warrants scrutiny."

CONCENTRATE ON EARNINGS

Extreme concentration does not necessarily mean stocks at

the top are overvalued, however, if the fundamentals of the top

firms are also booming.

Look at U.S. earnings. The top tech stocks accounted for 53%

of the S&P 500's returns last year, according to analysts at

Goldman Sachs. And two-thirds of the projected $150 billion rise

in first-quarter earnings this year are expected to come from

tech and communications services, LSEG estimates show.

What's more, not all concentration is created equal. Narrow

leadership will naturally be higher in an index made up of a

relatively small number of companies, as is the case in Taiwan

and Australia.

Investors may also consider dominant stocks in these small

markets to be relatively low risk if they are global giants

operating in all regions, as is the case with TSMC and Samsung.

It's also notable that there does not appear to be a clear

link between concentration and volatility. When U.S. index

concentration is historically high, the volatility of the index

including megacap stocks is lower than without them, according

to Goldman. For non-U.S. developed markets, it is higher.

LOOKING INTO THE FUTURE

Market concentration is increasing globally, and there is

reason to believe this will continue - but that's not

necessarily synonymous with rising risk.

In a world of greater fragmentation, a technological arms

race and larger government footprints in business, more

countries may start to have "national champions," companies

backed directly or indirectly by governments.

Look at U.S. chipmaker Intel ( INTC ) and its trajectory

since the U.S. government took a 10% stake last August. Its

shares have more than trebled in the last six weeks, taking its

market cap to more than $600 billion from $185 billion.

Even if governments aren't taking direct ownership stakes,

they may be less apt to crack down on market giants if they are

concerned about whether their tech companies can compete with

peers in rival countries.

Of course, the more top-heavy markets get, the greater the

risk of a disorderly reversal. Properly gauging that risk may

become increasingly challenging though, as the global economy

appears to enter a new phase where the last century's rules no

longer apply.

(The opinions expressed here are those of the author, a

columnist for Reuters)

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(By Jamie McGeever

Editing by Marguerita Choy)