2026 Tech Horizon: Expansion Ahead

Key Takeaways

• The AI-led market performance has been concentrated in a handful of names, creating a risk of overconcentration for investors.
• Diversification may matter as much as innovation in 2026, and investors should consider broadening their exposure beyond public U.S. mega-caps.
• The AI ecosystem is expected to accelerate in 2026, with enterprise adoption scaling and the ecosystem expanding across various industries.
• China is expected to solidify its position as a leader in AI technology, forming a duopoly with the US.
• Investors can reduce concentration risk by using equal-weight strategies, theme-weight strategies, and allocating to private markets, China’s AI ecosystem, and physical AI.

Introduction to AI and Market Performance
Artificial intelligence (AI) appears to be driving another industrial revolution, with its rapid adoption leading to significant gains in the market. However, this growth has been concentrated in a handful of names, including the "Magnificent Seven" and a small group of core infrastructure beneficiaries. Nearly 40% of the S&P 500 Index’s total return in 2025 came from just five stocks: Nvidia, Broadcom, Alphabet, Microsoft, and Palantir. This creates an uncomfortable trade-off for investors, who must decide whether to remain exposed to the AI market or risk overconcentration in a handful of names.

Concentration Risk and Diversification
The concentration of AI-led market performance in a handful of names creates a significant risk for investors. To mitigate this risk, investors should consider broadening their exposure beyond public U.S. mega-caps. This can be achieved by allocating to private markets, expanding into physical AI and robotics, diversifying geographically, and employing weighting methodologies that go beyond traditional market-capitalization approaches. Equal-weight strategies and theme-weight strategies can help reduce concentration risk and avoid the "AI theater" trap, where companies rise on hype rather than demonstrable products or economic impact.

Giants Avoiding Public Markets
Many companies, including OpenAI, xAI, and Anthropic, are choosing to remain private for longer. This trend is driven by higher interest rates, the increasing complexity of investments in AI infrastructure, and other factors. As a result, the average age of a firm at IPO is increasing, and many of the US’ market leaders in AI are private companies. For investors, this creates a structural gap, making it difficult to achieve truly diversified AI exposure without some allocation to private markets.

Physical AI and Its Impact
Physical AI, including robotics and autonomous systems, is a new frontier that could shift investor attention from purely digital AI to embodied applications with visible productivity benefits. The market for AI-enabled, physical productivity tools, such as humanoid robots, is expected to experience strong growth in 2026 and beyond. This could be a reason to include more industrial and materials firms in a technology allocation, enhancing diversification.

China’s Role in the AI Ecosystem
China’s technology sector has outperformed broad-based US, global, EM, and EM technology indexes over the past 15 years, albeit with significantly more volatility. In 2025, international markets overall bucked the decade-long trend, outperforming the US, and China led this outperformance. China’s equity market gains were driven by homegrown technological innovations, especially in artificial intelligence. The country’s 15th Five-Year Plan, due to be released in the first quarter, may provide a significant tailwind to technology stocks. We believe that China will continue to be a leader in AI technology, forming a duopoly with the US.

Implementation and Conclusion
To reduce concentration risk, investors can add the KraneShares Global Humanoid and Embodied Intelligence Index ETF (Ticker: KOID) or the KraneShares Artificial Intelligence & Technology ETF (Ticker: AGIX) to their portfolios. These funds employ equal-weight strategies and theme-weight strategies, respectively, and can provide exposure to a diversified portfolio of AI companies. Investors can also allocate to China’s AI ecosystem using the KraneShares CSI China Internet ETF (Ticker: KWEB) or the KraneShares SSE STAR Market 50 Index ETF (Ticker: KSTR). In conclusion, while concerns about the late-stage economic cycle may affect technology investors in 2026, we believe that technology shares could continue their bull run, driven by strong earnings expectations and a potentially sustained boost from innovation acceleration, especially from AI companies.