The way financial markets have acted in recent years has been almost theatrical. The same seven names will be repeated like a mantra whenever you enter an investment office, the kind with glass walls, standing desks, and glowing Bloomberg terminals. Alphabet, Apple, Microsoft, NVIDIA, Meta, Amazon, and Tesla. They refer to them as the Magnificent Seven.
And from January to May 2023, those seven names accounted for more than 104% of S&P 500 returns, carrying the entire market on their shoulders for a while. Just that final figure ought to make anyone stop. over 100% from fewer than ten businesses. Overall, everything else dragged.
Key Information: Mid-Cap AI Sector at a Glance
| Sector Focus | AI Enablers & Mid-Cap Equities |
| S&P 500 Mega-Cap Dominance (2023 peak) | Top 10 stocks contributed 104% of returns (Jan–May 2023) |
| Market Cap Added (Top 7 Names) | $4.5 trillion — over 10% of total US equity market |
| Key Mid-Cap AI Companies (Examples) | Monolithic Power Systems, CrowdStrike, Copart, Eaton, Amphenol |
| Investor Strategy | Picks-and-shovels approach — backing AI infrastructure & enablers |
| Primary Themes Beyond AI | Energy transition, healthcare automation, electric vehicles, cybersecurity |
| Reference: Equity Research | AllianceBernstein Equity Insights |
| Macro Backdrop | Higher-for-longer rates; inflation falling; tighter lending conditions |
| Notable Quote (Jim Tierney) | “We need to search for the real beneficiaries of AI — not just the AI halo.” |
It was an odd, confusing time. A few tech giants riding an AI wave that felt, to some, more like mania than revolution were quietly defeating investors who believed in diversification—the kind of portfolio managers who had built careers on finding value across sectors and market caps.
According to John Fogarty, Co-Chief Investment Officer of US Growth Equities at AllianceBernstein, “market concentration has challenged investors like us who believe in the spirit and letter of diversification,” pointing out that Apple’s market capitalization increased by $1 trillion during that time. Trillion. One business. 12 months. “Do you believe that seven or ten companies will monopolize the benefits of AI, or is AI a productivity tool that helps everybody?”
However, markets eventually turn, just like the tides. By July 2023, those ten stocks accounted for 69% of returns; they were still very large, but their hold had loosened.
Active managers began to breathe once more. And in the middle of the market, in that frequently disregarded area between the mega-caps and the tiny speculative bets, something more subdued and intriguing started to take place. Hedge funds with patience and a longer time horizon began paying close attention to mid-cap AI-adjacent companies, the kind that don’t make magazine covers or trend on financial Twitter.
Perhaps this is where the true story of AI has always been concealed. Not in the $2 trillion semiconductor behemoth, but in the businesses constructing the unglamorous infrastructure that makes AI feasible—or more affordable or environmentally friendly. One example that frequently comes up in institutional circles is monolithic power systems. The company produces power semiconductors that combine numerous components into more compact and effective solutions.
In tech media, it’s not a name that receives extensive coverage. However, a business that specializes in energy-efficient power management becomes less of a niche player and more of a vital supplier when AI data centers are using electricity at rates that actually worry grid operators.
Long before the term “AI power crisis” was widely used, Ben Ruegsegger, a portfolio manager at AllianceBernstein who specializes in sustainable thematic stocks, held a position in that field.
In these discussions, the picks-and-shovels analogy is frequently used, and it merits careful consideration. Shovel vendors frequently earned more steady income during the California Gold Rush than the miners pursuing the ore. A modern application of the same reasoning is offered by electric cars. Given the fierce competition, high capital needs, and constantly changing consumer preferences, it is extremely difficult to predict which automaker will rule the EV market ten years from now.
Regardless of which logo ends up on the hood, businesses like Eaton and Amphenol, which provide electrical equipment and components used across almost all vehicle platforms, will profit from increased EV adoption. When macroeconomic conditions become uncertain, institutional investors find comfort in that kind of structural inevitability.
Conditions have also been unpredictable. Corporate America is in a difficult position as a result of the Federal Reserve’s historically aggressive rate-hiking cycle. The Fed now has more leeway because inflation has significantly decreased, but borrowing costs are still high and the effects are still being felt in earnings. As nominal GDP declines, revenue growth is probably going to slow.
The pressure on costs hasn’t completely subsided. Careful fund managers are quietly accumulating the companies that can produce consistent, secular earnings growth in that environment—not because the macro is favorable, but in spite of it.
One that has recently come up more frequently in these discussions is CrowdStrike. This profitable and expanding cybersecurity company operates in a market where the attack surface grows yearly almost automatically. Increased devices, cloud infrastructure, and AI-generated code all increase the risk of vulnerability.
Before generative AI became popular, CrowdStrike used conventional machine learning to identify anomalies, and it is now incorporating those more recent features into its platform. Some investors believe that cybersecurity is one of those structural growth stories that only requires the internet to survive and doesn’t really require AI to be hyped. which appears to be a reasonably secure wager.
Copart is another company that sells damaged and salvaged cars, mostly to dealers and dismantlers in foreign markets. It sounds uninteresting. It’s not thrilling. However, it has been steadily expanding through different economic cycles, produces double-digit returns on capital, and enjoys a strong network effect with major insurers.
It’s difficult to ignore how frequently the top-performing fund managers’ portfolios contain these unglamorous, asset-light companies with real pricing power and long-term demand. Sometimes the market’s fixation with narrative leads to blind spots, and disciplined investors can take advantage of those blind spots.
There is still a lot of unanswered questions regarding AI in general, including who will actually prevail and how long it will take. Investors will eventually grow much more skeptical of the AI ramp-up, according to Jim Tierney, Chief Investment Officer of Concentrated US Growth at AllianceBernstein. Businesses with genuine business plans will stand apart from those that have merely embraced AI branding without any real substance.
It’s possible that the moment of reckoning has already quietly begun. It’s still unclear whether the productivity gains AI promises will materialize fast enough to support current market valuations at the top, and whether the companies that stand to gain the most will be those that are currently receiving attention or those that are being ignored.
There isn’t necessarily anything revolutionary being done by the mid-cap AI darlings that are making hedge funds wealthy. Many of them are just carrying out a necessary task. Power systems for ravenous data centers are being constructed. Corporate networks that cannot afford to go dark are being safeguarded.
Every electric car that comes off the assembly line has switches and connectors that are sold. The work is not glamorous. Additionally, it’s where the money is going more and more.
