AI frenzy drives US stocks to new highs, experts warn of the risk of cooling sentiment

According to the Zhitong Finance APP, this week, the S&P 500 Index and the Nasdaq Composite Index once again reached historical highs, with the strong performance of the artificial intelligence (AI) sector undoubtedly being the driving force behind it. Although if the AI boom cools down, the stock indices may face pressure, analysts believe this may not necessarily drag down the U.S. economy simultaneously.

Currently, U.S. stock valuations are indeed not low, but price is not the only indicator to determine whether it is worth buying, so concerns about a repeat of the "internet bubble" have eased relatively. Although the market is about to enter a traditionally unfavorable season, some investors may choose to take profits early, but the AI trades driving large tech stocks higher still have fundamental support.

Jessica Rabe, co-founder of DataTrek Research, pointed out that aside from Tesla (TSLA.US), analysts have raised the earnings expectations for the "seven giants" tech stocks and Broadcom (AVGO.US) for this year and next year, with average increases of 3.3% and 2.6%, respectively. The earnings expectations for Microsoft (MSFT.US), Apple (AAPL.US), Google's parent company Alphabet (GOOGL.US, GOOG.US), and Facebook's parent company Meta Platforms (META.US) have increased more than the overall level of the S&P 500 for 2025; by 2026, NVIDIA (NVDA.US) will also join this group.

Although NVIDIA and Broadcom have not yet released their latest financial reports, Rabe believes that the overall second-quarter earnings season can be considered "successful," with performance and upward revisions in earnings expectations indicating that the earnings momentum of large tech stocks remains strong, and is expected to continue driving individual stocks and the overall market higher.

However, investors remain concerned about the proportion of AI in this round of increases. Nicholas Colas, another co-founder of DataTrek Research, estimates that without the boost from generative AI, the S&P 500's increase this year might only be 3% to 4%, rather than the current 10%. NVIDIA, Microsoft, Meta, and Broadcom together account for 21% of the S&P 500's weight, contributing an astonishing 60% of the increase for 2025.

DataTrek remains optimistic about large tech stocks, with Colas believing that the aforementioned four companies demonstrate that their stock price valuations "have no natural upper limit." Although this sounds somewhat similar to the tech bubble of 1999, the current rise has a more solid earnings foundation. However, he also warns that if generative AI trades encounter setbacks, the S&P 500 could fall by at least 6%, and possibly as much as 14% or more, especially if investor sentiment turns sharply negative.

This is undoubtedly a risk for index investors, as these giants have a very high weight in the S&P 500. Historically, when the internet bubble burst, the U.S. economy also fell into recession simultaneously. However, Tom Essaye, president of Sevens Report, pointed out that the economic slowdown in the early 2000s was not solely triggered by the collapse of tech stocks; the 9/11 terrorist attacks were also an important factor Essaye stated, "The current market is indeed susceptible to the waning enthusiasm for AI-related tech stocks. Once investor optimism fades, the market will face resistance. However, this does not necessarily accompany an economic recession." He believes that even amid potential policy uncertainties (including tariffs and the White House's criticism of the Federal Reserve), the U.S. economy may still remain resilient or experience a scenario of "mild stagflation," where economic growth significantly slows down, inflation slightly rebounds, but if AI performance falls short of expectations, the market will still decline against a backdrop of macroeconomic stability