AI Is Quietly Starving the Rest of the S&P 500

The S&P 500 has always been a concentrated index. For most of its history, however, that concentration rotated. Railroads gave way to energy, energy to finance, finance to technology. What distinguishes the present moment is not that a handful of companies dominate the benchmark — it is that the rest of the index appears to be losing ground even as the leaders surge. According to reporting from The Wall Street Journal, the practical consequence for investors is a market in which stocks outside tech are expected to struggle, earnings growth is projected to expand more slowly across the broader index, and anxiety about credit risk is building in corners of the market that rarely make headlines.

That is a different kind of market regime than most diversified investors have been trained to expect.

How AI's Rise Is Reshaping the S&P 500 Landscape

Concentration in the S&P 500 has reached levels that invite comparison to the late 1990s. At the peak of the dot-com cycle, technology and telecom names accounted for roughly a third of the index's market capitalization before the bubble deflated. Today, the weight of the largest AI-adjacent megacaps has pushed tech-sector representation to comparable or greater extremes, with a small cohort of firms responsible for an outsized share of total index return. The mechanics are straightforward: because the S&P 500 is capitalization-weighted, every dollar that flows into the largest names mechanically increases their influence, pulling passive inflows toward the same handful of stocks regardless of whether an investor intends to make a concentrated bet.

The current episode differs from 1999 in one important respect. The dot-com leaders were largely speculative — many had no earnings at all. Today's AI leaders are enormously profitable, which makes the concentration more defensible on fundamentals and harder to dismiss as pure mania. That profitability, however, is precisely what starves the rest of the index. Capital, talent, and investor attention all flow toward the same destination. Companies outside the AI complex are left competing for a shrinking share of incremental investment dollars, and their valuations reflect it.

For index investors, the practical result is that "owning the S&P 500" no longer means what it did a decade ago. It increasingly means owning a leveraged bet on a single technological theme, wrapped in the appearance of diversification.

Non-Tech Stocks Face a Quiet Squeeze

The squeeze is most visible in earnings expectations. Consensus estimates compiled by FactSet and Bloomberg have consistently shown the largest technology firms delivering earnings growth at a double-digit pace, while the median S&P 500 constituent outside tech grows far more slowly — in some quarters, barely at all in real terms. That gap is the crux of the story. When a handful of companies generate the bulk of incremental index earnings, the index's aggregate growth rate becomes a poor guide to the health of the average company inside it.

Consider the arithmetic. If the top ten names contribute the majority of a given quarter's year-over-year earnings expansion, then a headline figure like "S&P 500 earnings grew 8%" can coexist with flat or declining profits for the other 490 companies. Investors who read the headline and assume broad-based strength are reading a statistic that describes a minority of their holdings.

Several forces reinforce the disparity. AI leaders command pricing power, access to cheap capital, and the ability to fund massive capital expenditure programs from operating cash flow. Mid-cap industrial, consumer, and healthcare names face the opposite conditions: higher financing costs, softer demand in rate-sensitive categories, and limited capacity to invest at the scale their larger competitors can. The result is a slow bleed rather than a dramatic collapse — the kind of underperformance that is easy to overlook quarter by quarter but compounds meaningfully over a multi-year horizon.

Credit Risk Concerns Are Rising Beneath the Surface

Equity concentration is the visible story. The quieter one is unfolding in credit markets. Fixed-income strategists and credit analysts have begun flagging widening spreads in sectors outside the AI ecosystem, where issuers face refinancing needs against a backdrop of elevated rates and uneven cash flow. When equity markets are calm, credit markets often serve as the early-warning system, and the signals there deserve attention.

The pattern is familiar to anyone who followed the 2000–2002 period or the 2008 crisis. Credit deterioration typically precedes equity recognition, not the other way around. Lenders and bondholders reprice risk first, because they are paid to care about downside. If high-yield issuers in non-tech sectors are facing wider spreads, that tells you the market is demanding more compensation to hold their debt — a direct reflection of perceived default risk.

Two dynamics amplify this. First, many non-tech companies refinanced debt cheaply during the low-rate era and now face maturities that must be rolled at materially higher coupons. Second, the AI capital expenditure boom is absorbing enormous amounts of available credit market capacity, crowding out smaller borrowers. Credit analysts at major fixed-income houses have noted that the marginal non-tech borrower is paying a premium that did not exist a few years ago. That cost flows directly into margins and free cash flow, further widening the performance gap with the AI leaders.

What This Means for Investors Holding Diversified Portfolios

For the investor who holds a broad index fund, the uncomfortable reality is that diversification has been quietly eroding. A portfolio that looks diversified by number of holdings may be highly concentrated by risk factor. If AI-related names stumble — whether from overinvestment, regulatory pressure, or simply a shift in sentiment — the index has less ballast than its construction implies.

This creates a genuine tension. Abandoning the index means forfeiting the returns that have driven portfolios for years. Staying fully indexed means accepting a concentration risk that many investors did not consciously choose. The sensible middle ground involves examining what you actually own beneath the ticker: how much of your exposure is genuinely diversified, and how much is a passive bet on a single theme.

Active managers focused on equal-weighted strategies, small- and mid-cap value, and dividend-oriented approaches have argued for years that the cap-weighted index distorts true opportunity. Their case is stronger now than it has been in two decades. The equal-weighted version of the S&P 500 has trailed its cap-weighted counterpart by a wide margin — a divergence that historically has not persisted indefinitely.

The Long-Term Outlook: Can Non-Tech Companies Compete?

The most important question is not whether AI leaders deserve their valuations. It is whether the companies outside that cohort can adapt. History suggests they can, but on a timeline that is uncomfortable for impatient capital.

Previous technology revolutions followed a recognizable arc. Railroads, electricity, and the internet each produced a period of extreme concentration, followed by diffusion as the technology became cheap and widely accessible. AI is likely to follow a similar path. The firms that figure out how to apply it profitably — in industrials, logistics, healthcare, financial services — may be the next decade's winners, and many of them are currently priced as if that possibility does not exist.

That asymmetry is worth noting. When the market assigns near-zero credit to the possibility that non-tech companies can use AI to improve margins, the risk-reward for selectively owning those businesses improves. It does not mean buying indiscriminately. It means recognizing that "the rest of the S&P" is not a monolith, and that within it are companies trading at valuations that assume they will never catch up.

Key Takeaways for Navigating the AI-Skewed Market

The S&P 500's AI-driven concentration is not a temporary distortion; it is a structural feature of the current market. Earnings growth differentials between AI leaders and the rest of the index are wide and likely to persist near term, and credit markets are beginning to price in the strain on non-tech issuers.

For investors, three practical implications stand out. First, understand that cap-weighted index exposure is a concentrated bet, whether or not you intended it as one. Second, watch credit spreads in non-tech sectors — they will signal deterioration before equity prices reflect it. Third, look for opportunity among the companies the market has written off, because the history of technology diffusion suggests that some of them will prove the consensus wrong.

The market is not broken. It is repricing around a genuine technological shift. But the cost of that repricing is being paid quietly by the hundreds of companies that no longer command the market's attention — and by the investors who assumed diversification would protect them from exactly this outcome.

Source: WSJ.com: Markets