The recent rise of the stock market to record highs is powered by a narrow, AI-driven engine, hiding a broader and deeper plunge in average stocks.
The S&P 500 continues to reach new peaks, but the underlying data reveals a stark divergence: the market's gains are almost entirely offset by the outperformance of a select group of "AI-powered" stocks.
Outside of the AI heavyweights, including Nvidia (NASDAQ:NVDA), Microsoft (NASDAQ:MSFT), and Broadcom (NASDAQ:AVGO), the S&P 500 index would actually be trading in the red.
The Story of Two Markets
The current market environment is characterized by a concentrated reliance on the narrative that artificial intelligence is fundamentally transforming the global economy.
Since the end of February, when regional tensions in the Middle East escalated, 118 stocks in the S&P 500 have fallen by more than 10%, mainly due to rising resource costs and exposure to economically sensitive sectors such as agriculture.
In comparison, only 82 stocks, the vast majority of which are directly related to AI, have shown an increase of 10% or more.
This phenomenon has created a "foam" in AI-related valuations, causing investors to demand entry points into large-scale upcoming IPOs, including Anthropic and OpenAI.
Although the dot-com era serves as a cautionary tale about "pickle and shovel" vendors experiencing unsustainable hype, bulls remain convinced that this cycle is different.
Optimistic investors argue that the sheer scale of AI's potential economic impact and the fact that current leaders are trading at more reasonable valuations than their 2000-era counterparts justify the premium.
The Bubble Puzzle
The fundamental question remains whether the market has outpaced the reality of AI's business applications.
Investors are currently financing the massive construction of data centers, even though a significant free cash flow from AI developers remains a long-term prospect for the end of the decade. As history shows, the danger lies not only in the potential for a correction, but also in the timing.
Even if a bubble is correctly identified, an early exit can be just as costly as completely ignoring the signs of excess, leaving market participants to bet on whether these technological transformations will justify today's prices or lead to another burst of speculative mania.