By Patturaja Murugaboopathy

Nov 25 (Reuters) - U.S. tech companies' share of S&P 500

earnings has been slipping even as their contribution to the

index's market value remains near multi-decade highs, raising

concerns that their prices are further removed from underlying

profit trends.

According to a Reuters analysis, tech companies accounted

for 20.8% of the S&P 500's total earnings in the third quarter,

down from 22.8% three quarters earlier. At the same time, their

share of the index's market capitalization rose to 31.1% as of

Friday, compared with about 30% at the start of the year.

Analysts warn that this disconnect, combined with the

sector's outsized weight in passive portfolios, could magnify

any disappointment in earnings and trigger broader index-level

declines.

"The wider gap between tech sector's percentage in the S&P

500 market cap is partly justified by genuine future earnings

power and FCF (free cash flow) growth, but not entirely." said

Illia Kyslytskyi, head of research at Yaru Investments.

Tech stocks have driven the market to fresh record highs on

expectations AI will generate outsized profits, leaving

valuations increasingly dependent on rapid earnings growth.

The tech-heavy Nasdaq Composite Index was trading at

a forward P/E of 29.28 based on current-year earnings estimates,

well above its 10-year average of 23.48 and higher than the S&P

500's 24.35.

Although the tech sector delivered strong profits in the

September quarter, led by AI names such as Nvidia ( NVDA ), some

analysts said the outlook for future earnings hinges on how

effectively AI translates into revenue for clients, and how

efficiently providers deploy their spending.

Alexander Lis, chief investment officer at Social Discover

Ventures, said the so-called "Magnificent 7" tech stocks saw

margins temporarily boosted by AI-related capex, with suppliers

booking revenue upfront, suggesting profitability could

normalise as spending slows.

The Nasdaq index is up 18.4% so far this year but has fallen

over 3.5% this month.

Derek Izuel, portfolio manager at Shelton Capital

Management, said tech stocks could see a mid-single-digit

pullback if earnings fail to keep pace with valuations.

"A more severe pullback that results in the risk premium

back to normal would be closer to a double-digit decline."