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Nvidia ( NVDA ) reports Q2 results after the bell Weds

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Heavyweight AI-linked tech stocks lead market higher in

2025

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Tech valuation above historic average, below dot-com

levels

By Lewis Krauskopf

NEW YORK, Aug 27 (Reuters) - The artificial intelligence

theme that has propelled markets over the past couple years

faces a crucial moment on Wednesday, when bellwether Nvidia Corp ( NVDA )

reports its second-quarter results.

Technology shares, including a number of signature stocks in

the AI trade, have wobbled this month with investors pointing to

some signs of caution emerging in the AI industry.

The declines have taken some of the steam out of an array of

tech and other stocks that have sizzled since chatbot ChatGPT

unleashed a frenzy over the potential for AI about three years

ago.

An equal-weighted basket of 50 AI-related stocks tracked by

Bespoke Investment Group -- which includes many of the world's

biggest tech companies -- has soared nearly 170% since the end

of 2022, as of Monday.

"AI is a critical piece of what is driving stocks right

now," said Peter Berezin, chief global strategist at BCA

Research.

This year, strong gains for number of heavyweight tech

stocks exposed to AI have helped power major equity indexes to

record highs.

Semiconductor giant Nvidia ( NVDA ) has ridden its position as the

dominant AI player to become the first company to top $4

trillion in market value last month.

Its more-than 30% gain this year alone has accounted for

nearly one quarter of the S&P 500's 10.4% year-to-date total

return as of Monday, according to Howard Silverblatt, senior

index analyst at S&P Dow Jones Indices. More broadly, 10 top AI

plays have contributed nearly half of the index's year-to-date

return, according to BCA Research.

Shares of data and analytics firm Palantir Technologies ( PLTR )

, have doubled, while other chipmakers including

Broadcom ( AVGO ) and Advanced Micro Devices ( AMD ) have also

handily outpaced the broader market.

Earlier in the reporting period, companies such as Microsoft ( MSFT )

and Google parent Alphabet unveiled

significant capital spending, as AI helped results.

AI stock enthusiasm has spread beyond tech and tech-related

areas including to utilities and power equipment companies amid

spiking energy demand expected to be needed to fuel the

technology.

Industrial firm GE Vernova ( GEV ) and utilities sector

members Constellation Energy ( CEG ) and Vistra ( VST ) are

among the non-tech stocks that have put up strong gains in the

past year, helped by AI excitement.

The AI enthusiasm has helped drive stock valuations well

above historical levels. The overall S&P 500's price-to-earnings

ratio, based on expected earnings over the next 12 months, last

stood at 22.4 times, according to LSEG Datastream. That is near

its highest level in over four years, and some 40% above its

long-term average of 15.9.

Tech -- which has by far the heaviest weighting in the S&P

500 of the 11 sectors -- has seen its forward P/E rise to 29.2,

about 36% above its long-term average of 21.4, according to LSEG

Datastream.

"There is a risk that we have gotten a little bit ahead of

our skis here and that some of the near-term expectations just

won't be realized," BCA's Berezin said.

The P/E valuations for both the tech sector and the S&P 500

are still below highs reached during the late 1990s and early

2000s, when many stock prices ran up to exorbitant levels during

the dawn of the internet, leading to a steep fall for tech

stocks in the ensuing years.

However, investors have pointed to the increasing presence

of the tech sector in market indexes as a sign the market may be

overly dependent on the performance of the group.

The tech sector comprises slightly over one-third of the

overall S&P 500's market value, not far from the 35% level it

reached in March 2000, according to LSEG Datastream.

Meanwhile, the combined market cap of the 10 biggest AI

plays, including Nvidia ( NVDA ), Broadcom ( AVGO ) and Microsoft ( MSFT ) -- stood at $18

trillion, BCA said in a note last week. That amounts to about

33% of S&P 500 stock market capitalization, up from around 15%

in late 2022, according to BCA.

Market concentration risk is "real and rising," Anthony

Saglimbene, chief market strategist for Ameriprise Financial,

said in a note

Nvidia's ( NVDA ) "commentary on Wednesday could help set the table

for how AI trends develop into year-end and, by extension, for a

market now anchored to a small group of very large and

influential technology stocks," Saglimbene said.