Wall Street's wider weakness keeps AI trade rolling
SPY•Weakness outside technology is helping sustain Wall Street’s AI trade, with technology and communication services expected to generate 42% of S&P 500 third-quarter earnings and 45% in the fourth quarter. The column warns that limited alternatives may prolong market concentration and make a reversal more painful.
1. Earnings concentrated in tech
A group of 41 AI-related stocks has accounted for 75% of S&P 500 returns, 80% of earnings growth and 90% of capital spending growth since ChatGPT launched in November 2022, according to JPMorgan Private Bank. Technology and communication services are expected to deliver 42% of the index’s forecast $783 billion in third-quarter earnings, with their share projected to rise to 45% in the fourth quarter.
2. Narrow market weakness
The S&P 500 fell 1.2% last Thursday as worries about AI investment hit chip stocks, even though 337 of its 500 constituents rose. The Philadelphia Semiconductor Index fell 20% in a little over two weeks, while Meta shares dropped 20% from their recent peak after investors reacted to its plan for a record $97.5 billion equity raise to fund higher AI spending. The S&P 500 and Nasdaq have since rebounded.
3. Risks and alternatives
The column argues that tepid growth elsewhere is limiting rotation away from technology and that a major downside surprise in tech earnings could trigger a more lasting reversal. A decline of 10% or more in the S&P 500 would be unusual: the index has had just one such downturn in the past four years, falling 20% from February to April last year during tariff-related market turmoil. HSBC strategists cut their maximum overweight equity position to neutral, but said dips in the coming weeks would likely be a good buying opportunity.
