By Lewis Krauskopf
NEW YORK, June 3 (Reuters) - The charge higher in U.S. technology stocks has made broader indexes as reliant as ever on the group -- and more vulnerable should those market leaders trip up.
With stunning gains over the past two months, the S&P 500 technology sector now accounts for more than 39% of the market capitalization of the overall benchmark index, its highest on record and above the level it reached during the 2000 Internet bubble.
"If the small number of tech stocks that
have been leading this market higher roll over, by definition, the indexes are going to roll over," said Matthew Maley, chief market strategist at Miller Tabak. "And when the indexes roll over in a meaningful way, the money flows inevitably reverse."
The massive build-out to support expected booming AI use has lifted profit estimates for semiconductor and other tech companies, and with it their shares.
"There is clearly an overarching AI theme to what is working," said Liz Ann Sonders, chief investment strategist at the Schwab Center for Financial Research.
While tech has long dominated the S&P 500, its recent outperformance bolstered its sway. Since the market's March low for the year, the tech sector soared nearly 47%, more than doubling the S&P 500's gain in that time, led by semiconductors. Micron shares jumped 230% in that time, while Intel and Advanced Micro Devices gained more than 160%.
The tech-driven rally has come despite headwinds from higher energy prices, amid the war in Iran, leading to inflation worries and expectations of a more hawkish Federal Reserve.
Investors are wary of some sort of trigger that could undercut the AI narrative.
"The way they're performing ... is like you're driving a race car at 200 miles an hour," said Walter Todd, chief investment officer at Greenwood Capital. "It doesn't take much to cause an accident at that speed."
STRONGER EARNINGS THAN DOT-COM BUBBLE?
While semiconductor shares have posted eye-popping gains, other tech areas have also performed well. The S&P 500 hardware group, including Dell, Cisco and Apple, is up over 40% since the March low. Software, which was pummeled earlier in 2026 on AI disruption concerns, is up 28%, recouping some losses.
The AI theme extends beyond tech. For example, with Alphabet, Amazon and Meta Platforms -- megacap companies not classified as tech stocks but that spend massively on AI infrastructure -- the share of S&P 500 market value in tech and AI-investing companies swells to more than half. Industrial and utilities companies are benefiting from construction and energy demand tied to the AI build-out.
Tech on Monday reached 39.4% of the S&P 500's market cap, above the nearly 35% level from March 2000, according to LSEG Datastream.
One distinction between now and then? Stronger profits, according to Bespoke Investment Group. The tech sector accounts for more than a quarter of trailing 12-month net income among S&P 500 members, almost twice the share in the first quarter of 2000, the dot-com bubble peak, according to Bespoke.
"It's not clear that earnings growth can keep up with what the market is pricing in, but in terms of profitability, this latest surge in market cap share looks much more sustainable and much less unreasonable than the one that peaked a quarter century ago," Bespoke said in a note last week.
SIGNS OF A NARROW RALLY
The tech-led market is causing concerns the rally is narrow and not bringing enough stocks along for the ride.
About 60% of S&P 500 constituents are trading above their 200-day moving averages -- a closely watched trend line -- below the historical average of roughly 73% typically seen when the index is making new highs, according to Adam Turnquist, chief technical strategist at LPL Financial.
However, in this bull market that began in October 2022, Turnquist noted that an average of 61% of the index has traded above their respective 200-DMAs, near current levels.
While market breadth has been "underwhelming for a market making new highs ... this is pretty characteristic of the bull market we've been in," Turnquist said.
Another sign of a narrower rally is the S&P 500, which is influenced by companies with large market values, beating an equal-weight version of the benchmark index, which many investors view as a gauge of the average index stock. The S&P 500 as of Friday had outperformed its equal-weight counterpart by the largest amount in a nine-week period, according to LSEG Datastream data dating to 1990.
That relative strength "means the largest companies are producing much higher returns relative to the average company," said David Lefkowitz, head of U.S. equities at UBS Global Wealth Management.
The firm wants clients to make sure they are not too heavily allocated toward winners of the past few years, Lefkowitz said.
"We do think the AI trade has further to go, but we also think this is an opportunity to rebalance and ensure that portfolios don't have too much risk," Lefkowitz said.
(Reporting by Lewis Krauskopf; editing by Megan Davies and Nick Zieminski)
