'It does feel a little bit casino-like': The AI rally has hit late-1990s extremes, Wall Street says — 5 stocks now drive half of S&P 500's gains

According to CNN's stats, the Philadelphia Semiconductor Index (SOX) skyrocketed 70% between March and mid-May, while the tech-heavy Nasdaq rose about 20% over the same period (1).

But UBS reported that only five big tech stocks — Nvidia, Alphabet, Amazon, Broadcom and Apple — accounted for around half of the S&P 500's gains between April 1 and May 6. Looking at the whole of the S&P 500, analysts found that 10 companies are now at 40% of the index's weight, and only Berkshire Hathaway isn't an AI all-star (2). And semiconductors alone are at a record 15% of the S&P 500, according to data published on Morningstar (3).

So, if a stock isn't involved in tech, they may not have been invited to the recent party.

In fact, CNN reported that 5% of the S&P 500's components were at 52-week lows even as the index notched new all-time highs (4).

The stats from UBS back this up with the market's "effective number" of leadership stocks collapsing to 42 in May. For context, the long-term average is around 100, which shows just how concentrated money is in the tech sector (5).

The market's AI obsession

The overconcentration in AI-related tech has led more financial analysts to sound the alarm.

Barclays analyst Emmanuel Cau has expressed particular concern about how the market seems to be brushing off oil prices. As Cau noted in a recent note, "A further melt-up in equities is hard to justify unless energy risks ease meaningfully, particularly as the rally is reliant on narrow Tech leadership (6)."

Mark Hawtin, Global Head of Equity Trading at Liontrust Asset Management, was more blunt. In an interview with Bloomberg, Hawtin said, "It does feel a little bit casino-like" for semiconductor stocks (7). "It's not rational on a long-term investing time horizon for these names to be where they are.”

With prices for a new and disruptive technology at such lofty levels, it's almost inevitable for more 1990s dot-com bubble comparisons to enter the conversation.

Michael Burry, the investor famous for shorting the housing market ahead of the epic crash that fueled the Great Financial Crisis of 2008, wrote recently on his Substack that the market is "feeling like the last months of the 1999-2000 bubble."

BNP Paribas published a direct comparison between recent stock market activity and the euphoria just before the 1990s dot-com bubble burst (8). A few charts in this study overlaid the S&P 500's path beginning in January 1996 with the index's performance starting in January 2023 and show similar patterns.

BNP also researched price-to-earnings (P/E) ratios for the S&P 500 between both periods, noting that the S&P 500's P/E ratio climbed back toward levels last seen before the 2000 crash. A high P/E ratio can mean investors expect strong future growth from a company, but it can also mean it's overvalued (9).

BNP also points out that our inflation situation now is higher than it was in the 1990s: “It’s fair to say that back in 1996 inflation seemed under control and the Federal Reserve had more space to adjust its monetary policy to the events that followed.”

Additionally, they raise questions about the "sheer amount of debt" used to build out AI's infrastructure, which recalls the debt-fueled telecom buildout before the dot-com bubble (10).

Stay bullish, or prep for a plunge?

Despite all of the crazy metrics and the well-reasoned warnings, there's no denying this rally remains resilient for now (although tech wasn’t having a great time in early trading on May 15, with the Nasdaq down close to 1.5%).