Tom Essaye: AI Stocks Create Major Risk for S&P 500
Valuation gap suggests index could fall 20% to align with the market
S&P 500 Heavily Reliant on AI Stocks
The S&P 500’s heavy reliance on AI-linked mega-cap tech stocks is creating a significant risk for investors, said Tom Essaye, founder of Sevens Report Research and former Merrill Lynch trader.
Essaye pointed to a valuation gap of nearly five full points between the SPDR S&P 500 ETF Trust (SPY) and the Invesco S&P 500 Equal Weight ETF (RSP). To trade in line with the equal-weight index, the S&P 500 would need to decline by almost 1,500 points, he noted.
The disparity is being driven by the “magnificent seven” and AI-related names. Essaye warned that if enthusiasm for AI weakens—whether from reduced capex or slower adoption—the S&P 500 could drop more than 20% before valuations align.
He stressed that he is not predicting such a downturn but said the correlation between AI sentiment and the S&P 500 is “too strong to ignore.”
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