Singapore's Temasek warns of the ‘biggest risk’ facing markets right now

What does the “AI trade” mean in financial markets?

The “AI trade” is the market pattern of investing in companies expected to benefit from artificial intelligence. It includes major AI-linked businesses whose strong earnings and growth prospects support their stock prices.

Investors may buy chipmakers, cloud providers, software firms, or model developers. The mechanism is expectation: rising AI demand can lift revenue and profits, making these shares more attractive and helping related companies lead indexes.

The article shows why this matters now. AI and earnings momentum around key players have helped keep the S&P 500 near records, even as yields climbed. Yet the trade is concentrated. It is both an investment theme and a source of market concentration. Its importance can exceed AI companies’ weight because index performance follows the biggest winners.

How much of the market’s recent strength has depended on a small group of AI-linked winners?

The article does not provide a precise percentage of the market’s gains caused by AI-linked companies. It does show striking concentration: roughly half the stocks in the Russell 3000 were at least 20% below their June highs, even while the S&P 500 stayed near records.

The key example is the gap between index performance and individual stocks. A small group of large, successful AI-linked companies can lift a market-cap-weighted index. Their earnings momentum supports their share prices, while many other companies lag or fall. The index can therefore look healthy overall.

This concentration makes the market more dependent on those winners. If their earnings weaken or investor enthusiasm fades, the broad indexes may lose an important source of support. The article’s evidence signals narrow leadership, not uniformly strong conditions across the market.

Why have AI companies helped keep U.S. stocks near record highs even as Treasury yields and borrowing costs have risen?

Higher Treasury yields and borrowing costs normally make stocks less attractive, but strong AI-related earnings provided a powerful counterweight. Temasek’s Rohit Sipahimalani said AI and earnings momentum around key players helped keep the S&P 500 near record territory.

The mechanism is straightforward. When companies deliver strong profits or show credible growth, investors may accept higher share prices despite more expensive financing. Large AI-linked firms also carry substantial index weight. Gains in those companies can therefore support the overall S&P 500, even when many individual stocks are struggling.

This support is not evenly spread across the market. Sipahimalani noted that about half of Russell 3000 stocks were at least 20% below their June highs. The current reality is a resilient headline index with narrower leadership underneath. That makes continued earnings strength from AI leaders especially important.

What developments could cause investors to unwind the AI trade?

The AI trade could unwind if investors stop believing that the technology’s benefits justify its risks and costs. Temasek identified two clear triggers: safety concerns that bring tighter regulation, and signs that customers are not generating sufficient returns from AI spending.

Regulation could slow product launches, raise compliance costs, or limit how companies use powerful systems. Weak customer returns could hurt demand in a different way. If businesses cannot turn AI investments into useful savings or new revenue, they may reduce future spending. That would challenge the growth expectations supporting AI-linked shares.

The article says an unwind is not viewed as imminent, but bumps could occur in 2027. Temasek remains bullish over the longer term. Still, concentrated leadership means disappointing regulation or economics could affect both AI companies and the wider market.

What could happen to stock prices and market stability if the AI trade unwinds?

If the AI trade unwinds, stocks tied to artificial intelligence could fall as investors lower their growth expectations or sell crowded positions. The broader market could also weaken because those companies have helped support the S&P 500 near record levels.

The article highlights the mechanism through market concentration. Roughly half of Russell 3000 stocks were already at least 20% below their June highs, while a smaller group of winners carried much of the index’s strength. If those winners reverse, fewer rising stocks would be available to offset declines elsewhere.

The likely consequence is greater market instability, with sharper price moves and a weaker headline index. The article does not predict a specific size of decline. It says an AI reversal is the biggest market risk identified by Temasek, although the firm does not see one as imminent and remains optimistic long term.

Why does Temasek want a larger share of its AI investments in publicly traded assets rather than private companies?

Temasek prefers a larger public-market share because publicly traded assets are generally easier to buy or sell. That flexibility matters in artificial intelligence, where technology, competition, regulation, and business models can change quickly.

Currently, about half of Temasek’s AI exposure is in public assets. The firm would ideally raise that share to roughly 70% to 75%. If conditions change, it can usually adjust listed holdings faster than private investments. Private positions may be harder to exit quickly, especially when companies cannot be freely traded.

Temasek still invests in private model developers, including Axiom and Paradox. However, Sipahimalani said those holdings would have a different exposure size from areas offering more flexibility. The strategy is not a rejection of private AI companies. It is an effort to balance long-term participation with the ability to pivot as the sector evolves.

Why do higher Treasury yields generally put pressure on stock valuations, especially for fast-growing technology companies?

Higher Treasury yields generally pressure stock valuations because government bonds become more attractive and provide a higher risk-free return. Investors then demand better potential returns from stocks. This can reduce the price they are willing to pay for the same expected profits.

The effect is especially strong for fast-growing technology companies. Their valuations often depend on profits expected years in the future, rather than on large profits today. When interest rates rise, those future cash flows are discounted more heavily, lowering their present value. Higher borrowing costs can also make expansion and investment more expensive.

The article illustrates this tension: Treasury yields and borrowing costs rose, yet AI earnings momentum helped keep the S&P 500 near records. This explanation uses established financial-market principles beyond the article’s detail. It also clarifies why continued AI earnings strength matters so much to current valuations.

Key Facts:

📌 The AI trade centers on companies expected to benefit from artificial intelligence.

📌 Strong AI-linked earnings have supported major U.S. stock indexes.

📌 The trade can concentrate market gains among relatively few winners.

📌 Roughly half of Russell 3000 stocks were 20% below June highs.

📌 The S&P 500 stayed near records despite broad weakness underneath.

📌 A small group of winners supported the market’s resilience.

📌 AI-related earnings momentum helped offset higher borrowing costs.