U.S. tech stocks continue to dominate market gains — but their earnings contribution is slipping, widening a valuation gap that analysts warn could amplify downside risk.
📉 Tech share of S&P 500 earnings:
• 20.8% in Q3, down from 22.8% three quarters earlier.
📈 Tech share of S&P 500 market cap:
• 31.1%, up from ~30% at the start of 2025 — near multi-decade highs.
Analysts say this disconnect, combined with tech’s heavy weighting in passive portfolios, means any earnings disappointment could trigger broader index declines.
➡️ The Nasdaq now trades at a forward P/E of 29.28, well above its 10-year average (23.48) and the S&P 500 (24.35).
➡️ The index is up 18.4% YTD, but down 3.5% this month.
Experts warn AI-driven optimism may be running ahead of fundamentals:
- “The gap is partly justified by future earnings power… but not entirely,” says Illia Kyslytskyi (Yaru Investments).
- AI capex has temporarily boosted margins for the “Magnificent 7,” and profitability may normalize as spending cools.
- A mid-single-digit pullback is possible if earnings don’t keep pace — and a return to normal risk premiums could mean a double-digit decline, says Derek Izuel (Shelton Capital).