The 10 largest companies now make up about 40% of the S&P 500, up from about 28% in October 2022. An AI-led rally has concentrated the index’s gains among a small group of technology-heavy firms. The index stood near record highs on Oct. 9, three days before the fourth anniversary of its closing low.
Since its Oct. 12, 2022, low, the S&P 500 has gained 117%. That rise ranks as the eighth-longest bull market since World War Two and the sixth-best-performing, according to Ryan Detrick, chief market strategist at Carson Group. Experts commonly define a bull market as a gain of at least 20% after a decline of at least 20% from a peak, though they don’t all agree on the definition.
Gains Gather at the Top
AI investment has helped fuel corporate profits and economic growth, but the gains haven’t been spread evenly across the index. Only technology and communication services have outperformed the S&P 500 during the bull run. Those sectors include Alphabet and Meta Platforms. Nvidia’s market capitalization has surged to $5.8 trillion from $286 billion on Oct. 12, 2022, making it the world’s largest company by market value.
Thirteen U.S. companies have market values of at least $1 trillion, and all but two are either in technology or have significant AI exposure. The growing weight of the largest companies reflects what Angelo Kourkafas, senior global investment strategist at Edward Jones, called “fundamental strength and earnings outperformance.” He also warned of concentration risk. “If the prevailing theme goes out of favor, portfolios might feel it in an outsized way,” he said.
Hyperscalers building data centers are driving capital spending expected to help lift S&P 500 earnings more than 35% this year. Oxford Economics estimates that about one-third of recent U.S. economic growth comes from AI, including direct investment in AI infrastructure and stock-market gains that lift consumer spending. “You’re seeing that AI theme show up in the economy and in corporate profits,” said Anthony Saglimbene, chief market strategist at Ameriprise.
Earnings Depend on AI Spending
Analysts expect S&P 500 earnings to rise about 31% year over year in the third quarter. Two-thirds of that increase is expected to come from technology and AI-heavyweights Alphabet, Amazon.com and Meta Platforms, according to Tajinder Dhillon, LSEG’s head of earnings and equity research. Technology stocks helped push the S&P 500 to a record high during the week before earnings season, which was expected to unofficially begin the following week with results from banks including JPMorgan Chase and Goldman Sachs.
LSEG data showed nearly 54% year-over-year S&P 500 earnings growth in the second quarter, the highest rate since 2021. Excluding mark-to-market gains at Alphabet and Amazon.com on AI-related investments, growth came to about 35, still the highest since 2021. Analysts aren’t sure whether third-quarter growth will top that result, although most companies tend to beat analysts’ estimates.
Saglimbene said investors were “approaching peak earnings growth” for the current cycle. “A lot of this AI trade is built on continued capex spending, and every quarter we go, and they continue to spend, the hurdle rates get higher and the scrutiny gets larger.” Dhillon said semiconductor-company earnings are expected to have risen about 136% in the third quarter, down from about 158% in the second quarter, citing LSEG data. “Earnings estimate revision momentum is starting to cool,” said Nick Raich, CEO of the Earnings Scout. “We’re still going 100 miles an hour in the AI infrastructure buildout, but three months ago we were going 150 miles an hour.”
Rates and Other Risks
Higher interest rates and rising U.S. Treasury yields also challenge the rally. The Federal Reserve has pivoted to rate hikes as it tries to bring down high inflation; tighter policy could slow the economy, perhaps severely. The benchmark 10-year Treasury yield stood around 5.2% after recently reaching its highest level in 24 years. Higher yields create headwinds for stocks, including competition from bonds.
Energy earnings are expected to rise about 115% from a year earlier, while U.S. oil prices surged roughly 30% in the third quarter amid the ongoing U.S.-Israeli war with Iran. Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute, said consumer staples and real estate—sectors not related to AI—had among the weakest year-over-year third-quarter earnings growth estimates. He said heavy borrowers such as utilities also face risk from higher rates.
Kourkafas said Edward Jones remains overweight equities, though its recommendation is less aggressive than before as fixed income grows more attractive. “We still think that the bull market is not about to end ... but it makes sense to us to take some of the risk off the table,” he said. Mark Hackett, chief market strategist for Nationwide, said, “Four years is not, by any stretch of the imagination, scary with regards to a bull market.” He added: “They don’t end of old age; they end from disease.”