According to Tom Essaye, founder of the Sevens Report and former Merrill Lynch trader, the SPDR S&P 500 ETF Trust is significantly reliant on AI stocks. This concentration presents a key risk for the benchmark US equity index. The SPDR S&P 500 ETF Trust aims to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the S&P 500 index. In contrast, the Invesco S&P 500 Equal Weight ETF is designed to provide investment results which generally correspond to the price and yield of the S&P 500 Equal Weight Index.
Essaye highlights a substantial valuation gap of five full points between the SPDR S&P 500 ETF Trust and the Invesco S&P 500 Equal Weight ETF. He suggests that to trade in line with the broader market, as represented by the Invesco S&P 500 Equal Weight ETF, the S&P 500 would need to decline by almost 1500 points.
This valuation disparity, Essaye notes, is primarily driven by the ‘magnificent seven’ and AI-related technology stocks. A shift in sentiment towards AI, whether due to reduced capital expenditure or inadequate adoption rates, could trigger a significant correction. Essaye warns that the S&P 500 could fall by more than 20 per cent before aligning with the rest of the market in such a scenario.
Essaye clarified that he is not predicting such a downturn but emphasizes the strong correlation between the S&P 500 and enthusiasm for AI technologies. Sustained positive sentiment toward AI is crucial to maintaining the current valuation of the index.
