A rally in the US market, driven by the rapid advancement of artificial intelligence, which began in late 2022, has proven to be far less broad-based than the headlines suggest. The bulk of the gains is concentrated in a select few large companies, while the rest of the S&P 500 has been slow to pick up the pace.
John Higgins, chief markets economist at Capital Economics, says that without the AI factor, the S&P 500 would currently be hovering closer to the 5,000 point level, approximately 25% lower than its current value. In other words, the index appears impressive mainly due to a handful of companies propelling its growth at a rate that is not reflected in the broader market.
According to Capital Economics, concentration within the index is intensifying, with technology and communications sectors showcasing returns that other sectors can only envy from afar. Even the consumer sector looks strong primarily due to the dominance of large-cap companies. Equal-weighted indices present a markedly different—and much less impressive—picture.
To assess the impact of AI, Higgins compared the traditional market cap weighted index with its equal-weighted counterpart. Extrapolating from the end of 2022, the analysis indicated that removing the influence of the largest players would indeed result in the S&P 500 being significantly lower. This is supported by disparities between sectors: large caps benefit while mid-cap and small-cap companies have remained sidelined.
However, Higgins emphasizes that despite the dominance of tech giants, which account for more than 40% of the total market capitalization, over a third of the S&P 500 still falls outside this elite group. At present, the impact of AI is hardly noticeable among these companies. Yet, this could change as businesses start to leverage technologies not merely for show but to achieve tangible productivity gains.
Some attempts are already taking shape. Capital Economics cites Walmart as an example, as the retailer integrates AI through its partnership with OpenAI. Even traditional defensive sectors are starting to experiment. Although slowly, they are starting to embrace these innovations.
