The S&P 500 just did something it’s only done once before in history, and it could signal a big move in the stock market

THE S&P 500 (^GSPC -0.41%) surpassed the S&P 500 Equal Weight Index by more than 10% during the first half of the year, which had only happened once before. A handful of artificial intelligence (AI) companies are responsible. The companies in question have become so large that they significantly influence the performance of the index.

Specifically, Nvidia It alone has contributed 30% to the S&P 500’s gains since the beginning of the year. In addition, Microsoft, AmazonAnd Alphabet collectively contributed 26% of the gains, and Apple And Metaplatforms collectively contributed 11% to the gains. In short, six companies contributed two-thirds of the S&P 500’s rise through June.

Some analysts have described this phenomenon as a stock market bubble and expressed concern that the growing influence of a few AI companies could lead to a dot-com crash. But history shows that the S&P 500’s growing concentration could be a good thing.

Historically, when the S&P 500 outperformed its equal-weighted peer in the first half of the year, the index typically generated stellar returns over the next 12 months. Here’s what investors need to know.

History Says S&P 500 Could Return 18% by June 2025

The S&P 500 tracks 500 large U.S. companies. The index is weighted by market capitalization, meaning that larger companies have a greater impact on its performance. The S&P 500 Equal Weight Index (EWI) tracks the same 500 companies, but its equally weighted components impact performance to the same degree. The S&P 500 EWI was created in 2003, but back-tested values ​​begin in 1971.

Since then, the S&P 500 has outperformed its equal-weighted peer 16 times during the first half of the year. Even rarer, the S&P 500 outperformed twice by more than 10%. This happened most recently in the first half of 2024, when the S&P 500 returned 14.5% and the S&P 500 EWI returned 4.1%. But this incident is hardly comparable to the previous one in 1973.

To be more precise, both the S&P 500 and the S&P 500 EWI fell sharply in the first half of 1973. The S&P 500 simply fell less sharply, so it outperformed by 10.7%. This differs from the current situation because both indices rose in 2024. Investors should therefore not compare these two events in isolation.

Instead, it makes more sense to look at each year in which the S&P 500 beat the S&P 500 EWI in the first half of the year. The table below does just that. It shows the magnitude of the S&P 500’s outperformance in the first half of the year and how the S&P 500 will perform over the next 12 months.

Data source: YCharts.

As the chart shows, when the S&P 500 outperformed its equal-weighted peer during the first half of a year, it recorded a median return of 17.9% over the following 12 months. Past performance is never a guarantee of future results, but history suggests the S&P 500 will rise significantly – almost 18% – through June 2025.

Artificial intelligence stocks are not in a dot-com bubble

Some analysts have described the recent rise in artificial intelligence stocks, particularly chipmaker Nvidia, as a “stock market bubble.” Some have even compared the current market environment to the dot-com bubble, an event that ultimately tore the tech sector to pieces.

Neil Shearing of Capital Economics recently said: “The enthusiasm around AI has all the hallmarks of a bubble inflating. Colleagues Diana Iovanel and James Reilly added: “We believe the bubble will eventually burst beyond the end of next year, causing a correction in valuations.” After all, this dynamic has already occurred in both the dot-com bubble of the late 1990s and early 2000s and the Great Crash of 1929.”

Investors should avoid thinking along these lines. The current environment—that is, the AI ​​euphoria that has been unfolding since ChatGPT’s launch—bears only a superficial resemblance to the dot-com bubble. There are two important distinctions.

First, technology-intensive technologies Nasdaq-100 jumped 270% in the 18 months to March 2000. At that point, the index reversed course and plunged 80% in about two years. This is in stark contrast to the recent AI-fueled rally. The Nasdaq-100 is up just 80% in the past 18 months.

Second, the seven largest stocks in the Nasdaq-100 were trading at an average valuation of 80 times earnings in March 2000, according to Capital Group. Again, this is radically different from the current situation. The seven largest stocks in the Nasdaq-100 currently trade at an average valuation of 46 times earnings.

I’m not saying that all AI stocks are fairly valued, or that the excitement over AI will drive the stock market higher indefinitely. Technology often follows the Gartner Hype Cycle, which states that (1) irrational excitement first drives stocks too high, (2) irrational pessimism then drives stocks too low, and (3) reasonable expectations eventually put stocks on a gradual upward trajectory.

Bottom line: History tells us the S&P 500 will rise 18% over the next year, but there’s no guarantee that will happen. Wall Street could be disappointed by AI stocks tomorrow, and the S&P 500 could fall sharply if other concerns, such as valuations or the economy, take over.

But no matter which way the winds blow in the coming months, I don’t believe the current market environment is comparable to that of the dot-com bubble. And AI is not an overhyped phenomenon destined to disappoint. On the contrary, it will create considerable wealth for patient investors. To quote UBS According to analysts, “AI will be the most profound innovation and one of the greatest investment opportunities in human history.”