How Mega-Cap Stocks and Artificial Intelligence Are Redefining the S&P 500

Published Sep 21, 2025
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Market News
NVIDIA

By John F. Heerdink, Jr.

The S&P 500’s historic ascent in 2025 is forcing market veterans to rethink old assumptions about the drivers of U.S. equities, as Wall Street strategists point to persistent profit growth, expanding margins, and the relentless pace of artificial intelligence investment as key forces behind the current rally. Far from a legacy index of industrial giants, today’s S&P 500 is shaped by a handful of mega-cap technology leaders, whose influence is both a source of strength and growing scrutiny.

Changing Shape of the S&P 500

Unlike previous eras dominated by blue-chip manufacturers and broad-based economic growth, the current S&P 500 skews heavily toward information technology, a sector comprising roughly 27% of market capitalization in 2023—up from just 17% two decades earlier. Health care and financials each hold about 13%, while traditional stalwarts such as energy, utilities, and consumer staples have seen their weight decline. This concentration has a profound impact: about 1% of the constituents are responsible for most of the year’s gains, with big tech stocks generating up to 60% of returns in certain periods.

Fundamentals Drive Returns

Contrary to fears of speculative excess, recent analysis suggests that over half of the S&P 500’s 13% year-to-date return stems from tangible profit growth. According to Carson Group, earnings contributions accounted for about 7.6 percentage points, with another 4.4 points from valuation multiple expansion and only 1 point from dividends. Over the past five and a half years, a remarkable 76% of cumulative gains originated from rising earnings while just 28% arose from expanding valuation multiples, challenging the notion that the index’s surge is “bubble-fueled”.

Profit margins have also reached new heights. Forward margins climbed from just under 12% at the end of 2019 to a record 14% in 2025, bolstered by operating leverage and robust nominal GDP growth. Margin expansion alone contributed 2.4 percentage points to this year’s returns, reflecting the ability of top U.S. firms to weather a variety of macroeconomic regimes.

The AI Cycle and Narrow Market Leadership

Wall Street’s optimism is underpinned by continued enthusiasm for artificial intelligence and the potential for further regulatory easing from the Federal Reserve. Major investment banks lifted their S&P 500 forecasts, citing resilient earnings outlooks and the expectation that technology-led innovation will drive future profitability. Yet, some strategists caution that this “remarkable mania”—specifically the concentration risk posed by a few tech leaders—remains a vulnerability. History suggests that when leadership narrows, corrections can be more violent, an issue flagged by both Evercore ISI and independent voices in the market.

A Legacy Under Constant Renewal

Only 53 of the S&P 500’s original 500 companies remain from its 1957 inception, highlighting the index’s ongoing evolution. Giants like GE, U.S. Steel, and DuPont have given way to new titans but the principle remains: adaptation is central to long-term outperformance. The index’s composition reflects not just sectoral shifts but also the resilience of U.S. enterprise through booms, busts, and technological disruptions.

Risks Remain

Despite the bullish undertones, strategists caution that elevated valuations, declining market breadth, and increasing volatility in the tech sector could interrupt the rally’s trajectory. While the long-term secular bull may endure, the risk of disappointment rises if the current cycle of exuberance stumbles. As Benjamin Graham advised decades ago, investors must balance optimism with vigilance.

The S&P 500’s transformation serves as a reminder that while the index may no longer echo the diversified economy of generations past, its adaptability has been the true source of persistent strength. Whether present trends signal sustainable progress or precursors to more turbulent times, one lesson remains: the only constant in market history is change.