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2/7 They account for 44% of the S&P 500’s market cap and hit a peak of 49% earlier this month. https://t.co/ipW9mwNsyy 3/7 In his May 22 “Flow Show,” Michael Hartnett of BofA highlighted the chart below. It shows the stock market is the most concentrated in a single theme in 150 years. The last time we saw anything resembling this level of concentration was the railroads in the late 19th century. (Note: To say the stock market is the most concentrated in 150 years, we are using the table above showing a 49% peak, not the “AI Big 10” showing 40% that Hartnett uses below.) 4/7 And AI and non-AI stocks are starting to diverge from each other, as the following chart shows. https://t.co/innPdDmDB5 5/7 And this divergence between AI and non-AI stocks is showing up in the record divergence of other indices, such as the one below, which compares the S&P 500 market-cap-weighted index to its equal-weighted counterpart. https://t.co/Wk303cqudy 6/7 This distinction of two asset classes matters for two reasons: index investing and market signaling. Index investing is somewhat obvious, as nearly half of an index’s holdings are now tied to AI stocks. But what about market signaling? What is the stock market telling us about the economy? Consider the following two charts that show the same thing, differing only by time. The first starts on February 28, the day the Iran War began. The black line shows the S&P 500 is up almost 7% in four months, an impressive run. A standard interpretation is that the economy is doing well. But see the orange line, the 459 non-AI stocks. They are only up 1.5%, with the positive gains coming in the last few days. That suggests a very different interpretation of the economy. Nearly the entire 7% gain on the S&P 500 since February 28 was driven by AI stocks (red). 7/7 The next chart is the same but begins on June 2nd, the last all-time high in the S&P 500. It is down 3.36% in three weeks (black). Normally, a stock market falling about 1% a week would be concerning. But see the orange line, the 459 non-AI stocks. They are up 2.76% over the same period, a far different read on the economy. The decline was driven by the 41 AI stocks (red) falling 12.67% in the last three weeks. ---- The U.S. stock market might be two asset classes and should be treated as such. This is neither good nor bad, but it needs to be understood, and investment outlooks and interpretations need to be adjusted accordingly.