Key Takeaways:
The S&P 500 is up 4% since late February, but gains are concentrated in just seven AI-related stocks including Nvidia and Microsoft.
Excluding these seven companies, the total market value of the S&P 500 would be negative over the same period.
Market Breadth Declines
The S&P 500 has climbed 4% to new records since late February, a rally almost entirely powered by seven artificial intelligence-related stocks while the majority of the index has declined.
"The market is on a consistent basis underestimating the earnings power of tech, especially big tech," Venu Krishna, Barclays head of US equity strategy, said. "At the same time it is systematically overestimating the earnings of the rest of S&P outside of tech."
The market's advance is extraordinarily narrow. Since the end of February, 118 stocks in the S&P 500 have fallen more than 10 percent, compared with only 82 stocks—mostly AI-related—that have gained more than 10 percent. The group includes Broadcom, Alphabet, Amazon, Apple, Meta, Microsoft and Nvidia. Half of the S&P's 11 sectors are down over the period.
The concentration poses a significant risk for investors. If the handful of AI leaders falter, the broader market could see a sharp correction, as their outperformance is currently masking underlying weakness in sectors from industrials to consumer staples. The dynamic mirrors past technology bubbles where a small number of "picks-and-shovels" suppliers attracted massive investment before a broader shakeout.
The divergence between the AI-driven mega-caps and the rest of the market is stark. While the tech-heavy Nasdaq Composite is up 8% since the end of February, the average U.S. stock has fallen. Even within sectors showing gains, the story is skewed. The Consumer Discretionary and Communications Services sectors are positive, but their performance is dominated by Amazon and Alphabet, respectively.
This intense concentration has drawn comparisons to the dot-com bubble of the late 1990s. Cisco Systems, a star of that era, only recently surpassed its March 2000 share-price high, a cautionary tale for investors betting on today's AI leaders to grow indefinitely. While bulls argue that AI's transformative potential justifies current valuations, the path for the technology and its eventual winners remains uncertain.
The equity rally has occurred alongside significant moves in other markets. The U.S. 10-year Treasury yield recently saw a sharp 14-basis-point drop, while the U.S. Dollar Index has also declined. This suggests some investors are seeking safety even as stock indexes hit highs. Meanwhile, energy was the worst-performing sector, falling over 2 percent, reflecting concerns about global growth that are being overlooked by the AI-focused equity narrative.
This article is for informational purposes only and does not constitute investment advice.
