A Chart Turns a U.S. Stock Bull "Bearish": AI Bubble Risk Is Rising!

A staunch U.S. stock bull has issued a fresh warning: the risk of an AI bubble forming in U.S. stocks is rising, and recent developments have her more worried.  

 

RBC Capital Markets U.S. equity strategy head Lori Calvasina has repeatedly rejected claims the U.S. market is already in an AI bubble. But in her latest report, she voices new concerns—and attaches a chart that's making her increasingly uneasy.  

 

The chart below compares the weight of the S&P 500's 10 most valuable stocks to their share of total net income.  

 

 

Left chart: Black line is top 10 market cap weight, blue line is top 10 net income weight; right chart is market cap weight minus net income weight.  

 

As Calvasina notes, these stocks' weight in the index recently hit a new high above 44%. Per RBC data, that's the highest since at least 1990. Yet their share of total profits across all index companies hasn't fully kept up.  

 

She further explains that AI themes dominate the S&P 500's top 10: Nvidia, Meta, Broadcom, Microsoft, Amazon, Alphabet (Google's parent), Apple, and Tesla. Berkshire Hathaway is the only one without heavy direct AI involvement.

 

This isn't a new trend. Per Calvasina, since at least 2021, the largest S&P 500 names have gained overall index weight faster than their profit share.  

 

She says this is largely because investors are willing to pay a premium for stronger long-term earnings growth expectations—especially since ChatGPT sparked the AI investment frenzy in late 2022.  

 

But the gap has widened faster in recent months. Latest data to end-October: top 10 net income share of all S&P 500 companies' total net income at 34.3%. That leaves a 9.9 percentage point difference between their index weight and profit share—not far from the 10.3 points in March 2000 (dot-com bubble).  

 

Finally, Calvasina writes in the report: "While we mostly disagree the market is in an AI bubble like the TIMT one—fundamentals are better—we do think the risk has increased."  

 

TIMT here refers to Tech, Internet, Media, and Telecom. The acronym is often used for the stock bubble that peaked in early 2000.