The epic rise in the stock prices of the US technology giants has far outstripped the growth rate of their profits, which could mean that the S&P 500 index (SPX) looks more vulnerable, according to Torsten Slok, the chief economist of Apollo Global Management. In a report last Sunday, he pointed out that the top 10 companies in the S&P 500 index account for 35% of the index's market cap, but only 23% of the index's earnings. Slok wrote, "This difference has never been so big, which indicates a record-breaking optimism among the market for the earnings prospects of the top 10 companies in the index. In other words, the problem with S&P 500 index is not only high concentration, but also an historically highly optimistic attitude of a small number of companies towards future earnings." Due to the fact that the S&P 500 index is market cap-weighted, the soaring stock prices of large technology companies that have surged on the wave of artificial intelligence mean that the recent US stock market gains have been concentrated in only a few stocks, masking relatively mediocre performance in other parts of the index.

In a recent report, Omer Esiner of Commonwealth Foreign Exchange noted that the S&P 500 index's top 10 companies now make up 28% of the entire index, the highest level since the dot-com bubble of 2000. The report also pointed out that while the top 10 companies in the S&P 500 index's make up 28% of the index, their earnings growth only makes up 16% of the index's overall earnings growth. In other words, the top 10 companies' skyrocketing performance is out of proportion with their contribution to the overall health of the S&P 500 index.

Slok wrote, "This difference has never been so big before, which indicates record optimism among the market for the future earnings of the top 10 companies in the index. In other words, the problem with the S&P 500 index isn't just its high concentration. A small group of companies are also historically optimistic about their future earnings". As the market becomes more concentrated so do investors' portfolios, especially given the growing popularity of funds which track indices. The average weighting of large-cap funds for the S&P 500 index in their portfolios has increased to 33%, according to a recent Bank of America research report, from 26% in December 2022. In that same time, the top five holdings for these funds have gone from under 5% to over 25% of their portfolios.

The recent surge in US stocks has been concentrated in a few stocks due to market capitalization weighting, as large technology companies that have surged on the wave of artificial intelligence have soared in price. This has masked relatively mediocre performance in other parts of the S&P 500 index.

Before the recent sell-off in early June, Nvidia, a leader in the artificial intelligence chip market, contributed more than one-third of the gains in the S&P 500 index this year.

On June 12, Slok had warned that, "Such high concentration means that if Nvidia continues to rise, the situation will be good. But if it starts to fall, the S&P 500 index will be heavily affected."

As market leadership becomes increasingly concentrated, so do investors' portfolios, especially given the growing popularity of funds that track indices.

Large-cap funds' average weighting for the S&P 500 index in their portfolios has increased to 33%, according to a recent Bank of America research report, from 26% in December 2022. In that same time, the top five holdings for these funds have gone from under 5% to over 25% of their portfolios.

Wall Street analysts have been bullish on the S&P 500 index and have been jostling to raise their year-end targets. Even the biggest bear has thrown in the towel, becoming one of the most optimistic analysts.

Tom Lee, co-founder of Fundstrat Global Advisors, recently stated that the S&P 500 index could reach 15,000 points by the end of this decade. He isn't the only one making bold predictions. Yardeni has also been talking about another super-cycle in the roaring twenties, saying the S&P 500 index could surge to 6,000 points by the end of next year. By the end of this decade, the index could hit 8,000 points.