The artificial intelligence (AI) boom that has fuelled markets in recent years faces a key test on Wednesday, when industry bellwether Nvidia Corp reports its second-quarter earnings.

Technology shares, including many of the flagship stocks linked to the AI trade, have faltered this month as investors detect signs of caution within the sector. The pullback has cooled momentum in a range of technology and non-technology shares that have surged since ChatGPT ignited a wave of AI enthusiasm around three years ago.

An equal-weighted basket of 50 AI-related companies tracked by Bespoke Investment Group – featuring many of the world’s largest tech firms – has risen nearly 170% since the end of 2022.

“AI is a critical piece of what is driving stocks right now,” said Peter Berezin, chief global strategist at BCA Research.

This year, robust gains in heavyweight AI-linked technology firms have lifted major equity indices to record highs. Semiconductor giant Nvidia, the dominant player in the sector, became the first company to exceed $4 trillion in market value last month. It's more than 30% rally this year alone has accounted for nearly one quarter of the S&P 500’s 10.4% year-to-date total return, according to S&P Dow Jones Indices analyst Howard Silverblatt. More broadly, 10 leading AI stocks have made up almost half of the index’s advance so far in 2025, BCA Research said.

Shares in data and analytics group Palantir Technologies have doubled, while chipmakers Broadcom and Advanced Micro Devices have also far outpaced the wider market. Earlier in the reporting season, Microsoft and Google parent Alphabet unveiled major increases in capital expenditure, with AI providing a strong boost to results.

Investor enthusiasm for AI has spread beyond technology to sectors such as utilities and power equipment, driven by soaring energy demand expected to be required for the industry. Companies including GE Vernova, Constellation Energy and Vistra have recorded notable gains over the past year, aided by the AI trend.

The frenzy has also pushed valuations well above historical averages. The S&P 500’s price-to-earnings ratio based on projected 12-month earnings currently stands at 22.4 times, according to LSEG Datastream – its highest in more than four years and around 40% above its long-term average of 15.9. Tech’s forward P/E has climbed to 29.2, roughly 36% above its average of 21.4.

“There is a risk that we have got slightly ahead of ourselves and that some near-term expectations will not be met,” warned Berezin of BCA.

Even so, valuations remain below the extreme levels of the late 1990s and early 2000s, when the dotcom bubble burst. Still, analysts caution that the market may now be overly reliant on the sector’s performance.

Technology accounts for just over one-third of the S&P 500’s market value, close to the peak of 35% seen in March 2000. Meanwhile, the combined market capitalisation of the 10 largest AI-linked firms – including Nvidia, Broadcom and Microsoft – has surged to $18 trillion, or 33% of the S&P 500’s total value, up from around 15% at the end of 2022.

Market concentration risk is “real and rising,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial. Nvidia’s commentary on Wednesday, he added, could prove pivotal in shaping how AI trends evolve into the year-end and, by extension, the trajectory of a market increasingly tied to a small number of powerful technology stocks.

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