This chart shows the risk of an AI bubble is growing, says a stalwart stock-market bull

RBC Capital Markets' head of U.S. equity strategy, Lori Calvasina, a long-standing market bull, has expressed growing concern over a potential AI-driven market bubble. Her apprehension stems from data showing the S&P 500's ten most valuable stocks now account for over 44% of the index, a new peak since 1990, while their collective share of total S&P 500 net income has not increased proportionally, signaling a potential valuation-earnings disconnect.

Analysis

RBC Capital Markets' head of U.S. equity strategy, Lori Calvasina, a long-standing market bull, has expressed increasing apprehension regarding a potential AI-driven market bubble. Her concern is rooted in a significant valuation-earnings disconnect observed within the S&P 500.

The ten most valuable stocks in the S&P 500 (SPX) now command over 44% of the index's total weighting, marking an unprecedented peak since at least 1990. Critically, these companies' collective share of total net income for all index members has not grown proportionally to their market capitalization.

This disparity suggests that the market capitalization growth of these dominant stocks, often associated with AI-related optimism, is outpacing their fundamental earnings contributions. Such a divergence raises questions about the sustainability of current valuations and signals potential concentration risk within the broader market.

Key Decisions for Investors

• Investors should critically assess the valuation multiples of highly weighted S&P 500 constituents, particularly those benefiting from AI narratives, relative to their underlying earnings growth.
• Consider diversifying portfolio exposure beyond the top-heavy S&P 500 to mitigate concentration risk and explore opportunities in less stretched segments of the market.
• Monitor future earnings reports from these dominant companies for signs of fundamental performance catching up to market expectations, or further divergence that could signal increased bubble risk.