US Stocks Surge to Record Highs Fueled by AI, Masking Underlying Weakness

The S&P 500 has reached record highs, with a 14% increase this year, but this rally is masking a significant divergence among its components. A Reuters analysis of LSEG data reveals that over 40% of the companies within the index are trading lower in 2026. This concentration of gains in a few chipmakers and other AI-related heavyweights highlights the narrow breadth of the current bull market, which is approaching its four-year anniversary.

Memory-chip makers such as Sandisk and Micron Technology have more than tripled in value, while the median S&P 500 stock has experienced a modest gain of barely 4% in 2026. In stark contrast, over 200 companies in the index have seen their stock prices fall, with a quarter of the S&P 500 down 11% or more.

This trend has occurred despite the S&P 500 being on track for its fourth consecutive year of gains. The recent surge has been primarily fueled by explosive earnings growth from companies involved in artificial intelligence, while profit expansion in other sectors has remained subdued. The Federal Reserve's interest rate hikes, including one in September and expectations of further increases, have raised concerns about the broader economy's resilience and have negatively impacted demand for companies in the industrials, consumer goods, and real estate sectors.

"Anything outside of the AI trade or companies that benefit from higher energy prices face huge headwinds in the form of higher oil and higher yields," said Ross Mayfield, investment strategy analyst at Baird. "The Fed has killed a lot of bull markets in the past, and if we get into an aggressive rate-hike cycle, that will be tough to stomach."

Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder, noted that while higher interest rates contribute to the poor performance of many U.S. stocks, the overwhelming investor focus on AI-related companies leads to other sectors being overlooked. "AI is such a powerful story. I don’t think I’ve ever had as narrow a portfolio, in terms of themes, as I have now. I certainly own some non-AI names, but not many," Ghriskey said. "It’s such a strong story that it just attracts managers and assets. There will be some rotation away at some point, but then I expect it to come back."

Eight of the eleven S&P 500 sector indexes have seen gains this year, with energy leading at a 42% jump and technology following at a 32% surge. However, due to its significant market capitalization, the technology sector alone accounts for over 10 percentage points of the S&P 500's overall gain. The energy sector's contribution, in comparison, is less than 1%.

Morgan Stanley strategists recently advised to "favor large-cap quality, particularly asset light names with improving EPS revisions. We would add riskier stocks over the next month if the index comes down to finish what has been a multi-month correction under the surface."

Key contributors to the benchmark's advance this year include AI chipmaker Nvidia, which has added nearly 2% to the S&P 500's gain. Apple, Micron, and Advanced Micro Devices have each contributed over 1%. Conversely, Tesla's 15% dip this year has detracted approximately 0.3% from the index's rally.

Further indicating the market's narrowness, fewer than half of the current S&P 500 companies are trading above their 200-day moving averages, suggesting a weak underlying trend for many stocks. A week prior to this analysis, this rate stood at 40%, the lowest since May 2025.