AI-Driven S&P 500 Concentration Creates 'Sneaky Risk' for Investors
The S&P 500 has seen a surge in total returns over the last 12 months, reaching nearly 18%. This is far above its historic average of around 10%.
Advancements in artificial intelligence (AI) can be credited for much of this success. The technology sector within the S&P 500 has surged by a whopping 46% over the last six months, while all other industries combined have a total return of around 11% in that time.
The top 10 stocks within the S&P 500 account for $27.4 trillion of its value, or around 39%. These include Nvidia, Apple, Alphabet, Microsoft, Amazon, Meta Platforms, Broadcom, Tesla, Micron Technology, and Berkshire Hathaway. Nearly all of these companies are either heavily or tangentially focused on AI development.
The last time the S&P 500 saw such concentration was in 1965, when the top holdings included names like AT&T, General Motors, IBM, and DuPont. This concentration has been increasing since the current bull market began in late 2022, from around 26% to 39%. The S&P 500 Shiller CAPE Ratio currently sits at over 40, inching closer to the record high of 44 set during the dot-com bubble.
For S&P 500 investors, this combination of higher valuations and increased concentration creates a sneaky risk. When the tech sector imploded after the dot-com bubble burst, the S&P 500 lost nearly half of its value over the following two years.