Is AI Really Boosting the Entire S&P 500 — Or Just the Mega-Caps?

Artificial intelligence (AI) has become one of the most powerful forces driving global equity markets. Yet, recent analysis suggests that most of the gains attributed to AI are not evenly spread — they are concentrated in just a few large tech firms.

What’s the Big Picture?

• AI’s outsized impact: Capital Economics’ chief markets economist, John Higgins, argues that AI has fuelled so much market strength since 2022 that, without it, the S&P 500 would be substantially lower — perhaps near 5,000, around 25% below its current level.
• Increasing concentration: The S&P 500 is becoming less of a broad index and more a “top-heavy” bet. Big-tech companies are driving most of the rally.
• Big sectors dominating: Information technology and communication services — two of the most AI-reliant sectors — are outperforming the rest of the market.
• Not all 500 are benefitting equally: When comparing the market-capitalisation-weighted index to an equal-weight version, the divergence is stark. Capital Economics suggests that most of the return uplift has come from just a handful of names.

Who Are the Heavyweights?

Several major tech companies, deeply invested in AI, account for a large slice of the S&P 500’s value:

• According to The Motley Fool, five companies — Apple, Nvidia, Microsoft, Alphabet, and Amazon — now make up nearly 29% of the entire S&P 500.
• These “AI-giant” firms are pouring tens of billions into data centres, chips, cloud services, and AI research. Their influence is becoming increasingly dominant.
• Business Insurance reports that this concentration risk is very real: these mega-caps now account for a huge portion of both the S&P’s earnings growth and market value.

Are Other Companies Joining the AI Wave?

Not all firms in the S&P 500 are ignoring AI. Some non-tech names are also beginning to adopt AI more aggressively:

• Walmart, for instance, has formed a partnership with OpenAI — highlighting how AI is penetrating even traditionally defensive, consumer-driven sectors.
• As AI adoption matures, more companies outside the mega-cap tech space could start to meaningfully contribute to the broader market’s performance.

Why This Matters for Investors

This trend has significant implications for how people think about “broad-market” investing:

• Diversification risk: Investing in a market-cap-weighted S&P 500 fund today might not be as diversified as you think — a big chunk of the gains come from just a few names.
• Concentration risk: If one or more of these AI giants stumble, it could disproportionately drag down the index.
• Thematic vs. index investing: For those bullish on AI, investing in AI-specific funds or choosing equal-weighted ETFs might offer more balanced exposure.
• Long-term performance: AI adoption could eventually reach more companies, but for now, the biggest benefits seem reserved for the largest players — which means risk and reward both remain very much skewed.

What Could Happen Next

• As AI adoption spreads, smaller S&P 500 firms may start generating more value from AI, which could broaden the benefit beyond just mega-caps.
• On the other hand, if the AI boom cools or faces regulatory headwinds, the concentration risk inherent in the index could become a major vulnerability.
• Some analysts warn of a “narrative bubble”: while AI is transformational, not all companies will turn their AI ambitions into sustainable, profitable growth.

Bottom line: The S&P 500 today isn’t just a broad market bet — it’s very much a big-tech, AI-centric play. While many see this as an opportunity, it carries the caution that a handful of companies hold most of the cards. For investors, it’s worth asking: am I investing in an index, or in a few mega-cap AI providers?

Sources: (Investing.com, MotleyFool.com)