The S&P 500 has never looked more like a technology index wearing a broader-market label. Technology, Media, and Telecom (TMT) companies account for nearly half of the index’s total market capitalization — roughly 9 percentage points higher than the peak reached during the dot-com bubble and about 20 percentage points above the levels seen during the late 1960s.
Information Technology alone represents roughly 35% to 38% of the index, while Communication Services contributes another 10% to 11%. Add in technology-driven giants classified elsewhere, including Amazon (NASDAQ:AMZN | AMZN Price Prediction) and Tesla (NASDAQ: TSLA) in Consumer Discretionary, and the S&P 500’s exposure to the digital economy becomes even more pronounced.
That shift has been fueled by one powerful force: artificial intelligence.
The AI boom has transformed investor expectations around the largest technology companies, sending the so-called Magnificent Seven and other AI beneficiaries soaring. Their earnings growth, enormous cash flows, and dominance in emerging AI infrastructure have made them some of the market’s most valuable companies.
But their success has created a new challenge. When a handful of companies become responsible for such a large portion of an index’s gains, they also become responsible for a larger share of its volatility. A sharp decline in AI-related leaders could now move the entire S&P 500 far more dramatically than similar pullbacks would have in previous decades.
Concentration Risk Is Real
The concerns are understandable. Technology companies have dramatically increased their spending to support the AI race. Since 2019, tech sector capital expenditures have surged nearly 876%, compared with only 62% growth across the rest of the index.
That spending spree is creating questions about future returns. Building data centers, buying advanced chips, and developing AI infrastructure requires enormous upfront investment, and some analysts expect free cash flow pressure to build for companies such as Alphabet (NASDAQ:GOOG), Amazon, Apple (NASDAQ:AAPL), Meta Platforms (NASDAQ:META), and Microsoft (NASDAQ:MSFT) through 2028 as asset efficiency declines.
However, investors should be careful not to paint the entire S&P 500 with the same brush.
The current concentration risk is largely isolated within a small group of mega-cap technology companies. Deutsche Bank Research analysts Luke Templeman and Galina Pozdnyakova noted in a report last month that most companies outside Big Tech continue to show healthy balance sheets and do not appear excessively valued.
Many non-tech companies have spent recent years quietly strengthening their financial positions. Cash holdings have grown at roughly 8% annually since 2019, outpacing inflation, while net borrowing has remained limited. Unlike the biggest AI players, many traditional companies are entering the next economic cycle with flexibility rather than heavy investment burdens.
The Rest of the Market May Be Ready for a Comeback
That divide is reflected in valuations. Equal-weighted S&P 500 funds like the Invesco S&P 500 Equal Weight ETF (NYSEARCA:RSP) trades at a significant discount compared with the traditional market-cap-weighted index, while non-tech companies remain far cheaper than the Nasdaq-100 on a forward earnings basis.
Importantly, earnings growth outside technology is not disappearing. Non-tech companies are expected to deliver approximately 13.2% EPS growth in 2026, ahead of forecasts for Europe and Japan. While technology remains the growth leader at roughly 23.7% expected earnings growth, the rest of the market is hardly standing still.
Many of these companies also have the financial firepower to pursue acquisitions, increase dividends, and buy back shares — potential catalysts that could help broaden the market rally beyond AI winners.
Key Takeaway
The S&P 500’s record concentration in technology stocks deserves attention, but it does not automatically signal another dot-com-style bubble. The market’s biggest AI companies carry elevated expectations, but much of the broader index remains financially healthy and reasonably valued.
For investors, the lesson is not to abandon technology. AI could remain one of the most important growth trends of the decade. Instead, it may make sense to balance exposure by considering equal-weighted funds or selectively adding high-quality companies outside the tech sector.
The S&P 500 may currently look like a tech index in disguise, but underneath the surface is a broader market that could be waiting for its turn.
Contact [email protected] for any questions or corrections.
Top Gaining Stocks
Top Losing Stocks