The S&P 500’s performance in the first half of 2026 tells two very different stories. On one hand, the benchmark index has surged to record highs. On the other, the rally has been unusually narrow, driven largely by artificial intelligence (AI) and energy stocks while much of the rest of the market has lagged.
“Strip out AI and energy, and the S&P 500 is down,” Torsten Slok, partner and chief economist at Apollo, wrote in a post on the firm’s website.
Data from Fidelity as of June 18 shows the index’s gains are led by the information technology sector—the sector at the core of the AI trend—up by 21.06 percent year to date, followed by energy, up by 18.61 percent, and materials, up by 12.70 percent.
On the losing end, the health care sector led declines, down 3.85 percent, followed by financials, down 2.50 percent, and consumer discretionary, down 1.07 percent.
Why the Divergence?
The information technology sector has been boosted by surging capital expenditure on data centers, which is projected to top $1 trillion in 2026, according to new research from Dell’Oro Group.
A recent FactSet survey found that most analysts—69 percent—are most optimistic about the technology sector, which carries the highest share of Buy ratings among all S&P 500 sectors.
The energy sector, meanwhile, has benefited from rising oil prices following the outbreak of war in the Middle East. Some 61 percent of equity analysts remain bullish on the sector.
But elevated oil prices have also stoked inflation, squeezing consumer budgets and weighing on consumer sentiment, which was hovering near multiyear lows in May. Despite some improvement in June, it is still 13 percent below January 2026 and 19 percent below a year ago.
Consumers have eased spending on discretionary goods, with spending on furnishing and durable household equipment rising a mere 0.2 percent in April, compared with a 28.8 percent rise in gasoline and energy goods.
Weak discretionary spending helps explain the weakness in consumer discretionary goods stocks.
Higher inflation has also pushed long-term interest rates up, with the benchmark 10-year U.S. bond rate hovering around 4.5 percent, up from 4.10 percent six months ago.
Elevated long-term interest rates have been pressuring the utilities sector, which depends heavily on long-term debt to finance capital expenditures.
Effects on Market and Economy
Narrow rallies are not new in the long history of the S&P 500, since it is a “live index” that is constantly rebalanced. Even so, they can pose real risks for both markets and the broader economy.
For markets, concentrated and crowded trades—positions with a high ratio of active institutional investor involvement relative to their liquidity—can transform routine corrections into something far more serious, as leveraged investors rush for the exits simultaneously.
For the economy, narrow rallies channel capital into fast-growing emerging industries—a dynamic that has helped fuel the digital and AI capital expenditure boom, but one that can also lead to overinvestment, depressed returns, and, at times, severe economic contractions or outright recessions and depressions, as Robert Shiller and John Kenneth Galbraith, among others, have documented.
The scale of that digital expansion is significant. The Bureau of Economic Analysis estimates that the digital economy’s share of nominal GDP grew from 7.8 percent in 2005 to 10.3 percent in 2021, with real growth averaging 6.4 percent annually—far outpacing the broader economy.
The Interactive Advertising Bureau finds that the U.S. digital economy has more than doubled since 2020, reaching $4.9 trillion by 2025—equivalent to 18 percent of GDP.
Concerns
Some analysts have concerns about the concentration at the top of today’s market.
“The S&P 500 is currently being driven by an AI boom that’s so strong that the top 10 stocks within the index are responsible for around 40 percent of its entire market capitalization,” Iván Marchena, senior economist at global brokerage Just2Trade, told The Epoch Times. “To make matters more complicated, AI-related stocks comprise roughly 47 percent of the index.”
“What this means is that the ongoing AI and energy boom is masking signs of a steep recession elsewhere. Outside of the 84 AI firms and 22 energy stocks propping up the S&P 500, the rest of the index is currently in the red for the 2026 calendar year,” he said.
The heavy dependence on a continuing AI rally with stretched valuation creates a house of cards, according to Merchena.
Arie Brish, a professor at St. Edward’s University, echoed that concern.
“AI is driven by high investors’ expectations, rather than by economics. It is hard to predict when these investors will turn less optimistic,” he told The Epoch Times.
“On top of the optimism, AI-related semiconductors are traded these days with high multipliers. This is due in part to the general AI optimism mentioned above, and in part to demand exceeding supply. The demand/supply imbalance is expected to be resolved in the next few months, in which case we will see a correction.”
Marchena did not offer a specific timeline for a correction but warned it could be severe for the most overvalued market leaders.
“Should the exceptionally high price-to-earnings (P/E) ratios of AI leaders experience a correction any time soon, the scale of the subsequent selloffs could surpass the inflation-driven losses recorded in 2022,” he said.
