The U.S. stock market is a marvel. Despite the disruptive policies of the Trump administration, it has found a way to prosper.
Tech stocks have soared, fueled by hopes for advanced artificial intelligence. Nvidia, which makes many of the chips that fuel A.I., crossed a new market threshold this summer. It became the first company worth more than $4 trillion and now accounts for about 8 percent of the value of the entire S&P 500 stock index.
Nvidia has a larger share of the market than any company has had in the 35 years that the Leuthold Group, an independent financial research firm in Minneapolis, has tracked this data.
But it’s not just Nvidia. There are nine other companies worth at least $1 trillion in the U.S. market, according to FactSet. All but Warren Buffett’s Berkshire Hathaway are tech stocks, broadly defined. Microsoft and Apple are valued at more than $3 trillion; Alphabet (Google) and Meta (Facebook) are worth more than $2 trillion; and then come Broadcom, another big chipmaker, and Tesla (an auto company, yes, but one with tech characteristics). Berkshire Hathaway is last on the list with a value of about $1 trillion.
Tech rules. That’s a statement I could have made in 1999, during the dot.com bubble, but it’s even more true now: The stock market is far more concentrated today, with a top-heavy weighting toward fast-growing tech stocks.
Investors with big tech weightings in their portfolios — and that now includes everyone holding the entire stock market through index funds — are profiting.
But when the stock market becomes this unbalanced, risks abound.
Going to Extremes
After sharp declines in April set off by the Trump administration’s imposition of the highest tariffs since the 1930s, the S&P 500 is having an improbably good year. The tech sector is responsible for most of those gains.
Through July, the information technology sector, led by Nvidia, Microsoft, Broadcom, Palantir Technologies and Oracle, accounted for almost 54 percent of the S&P 500’s 8.6 percent total return, according to Howard Silverblatt, a senior index analyst for S&P Dow Jones Indices. The communications services sector, to which Meta, Netflix and Amazon belong, was responsible for another 15.4 percent of the S&P 500’s return. Between these two tech sectors, that’s almost 70 percent of the total return of the entire index.
The market looks even more top-heavy when you examine individual stocks. Nvidia is the big gorilla, accounting for 26.2 percent of the S&P 500’s total return. And here are the next four stocks:
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Microsoft, 21.6 percent of the S&P 500’s total return through July.
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Meta, 9.8 percent.
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Broadcom, 8.3 percent.
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Palantir, 4.5 percent.
If anything, these statistics understate Nvidia’s role as a pillar of the market. The company is both the crucial player and leading beneficiary of the race to build advanced, generative artificial intelligence — A.I. that one day will be superior, in at least some respects, to human intelligence. An arms race is already underway. Alphabet, Microsoft, Meta and Amazon have announced, among them, plans for $400 billion in capital expenditures this year, much of it on A.I. infrastructure.
Electrical utility shares have been rising, along with those of tech companies, because A.I. data centers require enormous quantities of energy — a development that is positive neither for the environment nor for consumer electrical bills, but it’s necessary if A.I. computing power is to keep growing.
For now, the lion’s share of the A.I. spending is going to Nvidia. The company is immensely profitable, growing rapidly and producing jaw-dropping returns for investors — an annualized gain of more than 70 percent, including dividends, over the past five years, according to FactSet. This year, Nvidia’s shares have returned about 30 percent. It reports earnings on Wednesday, and they are expected to be splendid.
If the company fails to deliver, though, watch out. The A.I.-stock-market ecosystem — which now dominates the entire stock market — would immediately shudder.
By some measures, Nvidia’s ability to keep churning out growing profits has become even more important for the overall stock market than whether the Federal Reserve cuts interest rates at its next meeting, and that’s saying a lot: The central bank’s influence is gigantic.
Extreme valuations are seeping into other parts of the market. Take Palantir. It uses advanced technology to advise the U.S. military and scores of big companies — and to help the Trump administration collect and compile personal information on millions of Americans. All this has made Palantir the top performer in the S&P 500 this year, with a gain of more than 100 percent, according to FactSet.
Traders have bid up its share price to otherworldly levels. Palantir’s price-to-earnings ratio, a standard valuation measure that compares share price with corporate profits, of more than 570 is roughly 20 times the average stock in the S&P 500, according to FactSet.
“Palantir might be the most overvalued firm of all time,” an article in the Economist magazine recently declared. I wouldn’t go that far. After all, Palantir has substantial earnings (and so does its chief executive, Alex Karp, who led the latest New York Times tally of the highest-paid U.S. executives of publicly traded companies).
Then and Now
Many high-flying tech companies in the dot.com era never made a profit.
I’m thinking of Pets.com, which was a household name in 1999 and 2000 because of its comic Sock Puppet, a toy dog that appeared all over television. The company became infamous — an emblem of speculative excess — when it spectacularly collapsed. Many investors lost everything when the company filed for bankruptcy in 2000.
Comparing the money-losing companies of the dot.com era with the profitable but extravagantly valued firms of today’s market doesn’t make a lot of sense. It’s a different situation now.
But as far as market concentration goes, the current alignment is the more troubling. In 1999, Microsoft was the biggest company in the market, but it occupied a comparatively modest 4.9 percent weighting in the S&P 500. And it contributed just 11.9 percent to the index’s total return that year, according to Mr. Silverblatt.
These were the other top stocks and their contribution to the S&P 500’s 21 percent return for the year:
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Cisco Systems, 10 percent.
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General Electric, 8.4 percent.
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Walmart, 6.1 percent.
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Oracle, 5.7 percent.
Combined, the top five accounted for 42.1 percent of the S&P 500’s return that year — a colossal amount, but a pittance compared with more than 70 percent for the S&P 500’s top five companies today.
If something should go wrong with these critically important companies — with the Trump economy — the market may not have much of a foundation to rely on. So diversify globally, with bonds as well as stocks, and be prepared for reversals in this uncanny market.
Jeff Sommer writes Strategies, a weekly column on markets, finance and the economy.
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