Has the AI Rally Made S&P 500 ETFs Too Risky? What Investors Need to Know
Key Points
The Shiller CAPE ratio suggests that the S&P 500 is historically expensive right now.
The index is also as concentrated today, both in tech stocks and in its top 10 holdings, as it's ever been.
Here's an ETF idea to consider if you want to address both risks simultaneously.
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The artificial intelligence (AI) boom has created one of the most investor-friendly stock markets ever.
The S&P 500 (SNPINDEX: ^GSPC) has returned 24%, 23%, and 16%, respectively, over the past three years. It's up another 10% this year, which, if it holds, would put this bull market in rarefied air with four consecutive double-digit return calendar years.
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The AI rally has also created some problems.
Valuation and concentration within the index have become reasonable risks that could pose higher-than-average downside risk should market conditions change.
Image source: Getty Images.
Valuations are high ... or maybe they're not?
Whether stock prices are viewed as expensive or not really depends on the metric you're using.
The Shiller CAPE ratio, which measures the S&P 500 relative to inflation-adjusted earnings over the past 10 years, is currently 42. That level has been reached only one before in history -- the lead-up to the tech bubble bursting in 2000.
On the other hand, the forward price/earnings (P/E) ratio for the S&P 500 today is right around 21. That's above average by long-term historical standards, but it's well below the 2024 peak of 23.7. Based on current earnings growth expectations for the next several quarters, stocks seem to be pretty reasonably priced.
But I don't want to discount what the Shiller CAPE ratio is telling us. Stocks have been in a rarely interrupted three-plus-year bull market, and there's a lot of optimism still priced in. Investors shouldn't be getting ahead of themselves here.
Tech concentration has never been higher
The tech sector accounts for roughly 40% of the S&P 500 right now. It wasn't even that high during the peak of the tech bubble. Plus, the top 10 holdings alone account for nearly 40% of the index as well. Investors may not mind this when stock prices are going up, but we're sitting right in the middle of an unprecedented period of index concentration.
This isn't necessarily a sell signal, but it is a warning that S&P 500 ETF performance is heavily influenced by just a handful of companies. If anything were to happen to any one of those names, it could drag the index down quickly.
An option to reduce S&P 500 risk in your portfolio
If you want to address the valuation and concentration risk problems at the same time, consider the Invesco S&P 500 Equal Weight ETF (NYSEMKT: RSP). Individual company risk is virtually non-existent, and five different sectors have weightings of at least 9%. And the forward P/E ratio on this fund is only 17, a much more reasonable long-term level.
The AI rally has produced huge returns for many investors over the past few years. But now it's time to look at some of the risks that rally has created.
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*Stock Advisor returns as of July 16, 2026.
David Dierking has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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