Experts warn of dangerous market disparity as AI stocks surge in isolation
With AI-driven equities racing ahead while the majority of S&P 500 components struggle, analysts draw parallels to the pre-dot-com bubble era amid signs of overbuilt infrastructure and hype-driven valuations.
Investment strategist Jim Paulsen has issued a stark warning regarding a dangerous divergence in the US stock market, where artificial intelligence-driven 'new era' stocks are surging in isolation while the majority of companies struggle. Paulsen, formerly the chief investment strategist for the Leuthold Group, now publishes his analysis via Substack, where he highlights an alarming drop in the correlation between old and new era stock price movements. This pattern, he notes, is historically associated with market downturns and suggests that the contemporary rally may not be sustainable.
The disparity is evident in recent performance data, with new era AI stocks outperforming the rest of the S&P 500 index by nearly seven times over the preceding two months. While AI equities gained 36.2 per cent, the broader index rose just 5.3 per cent. This bifurcation has reached unprecedented levels, with some AI forerunners pulling ahead of established giants like Apple, Amazon, and Alphabet despite lacking profitability or possessing overinflated valuations.
In mid-May, 5 per cent of S&P 500 components hit 52-week lows even as the overall index reached record highs. Paulsen points out that this phenomenon has occurred only four times in recorded history. He questions the sustainability of a bull market where most companies are essentially failing, noting that the correlation between traditional sectors such as banking and manufacturing and tech stocks has historically served as a key risk indicator for investors.
Other prominent financial figures, including Michael Burry and Jamie Dimon, have drawn comparisons between current market conditions and the pre-dot-com bubble era. Burry has cited the sector’s supply-side gluttony and catastrophically overbuilt infrastructure as key risks, arguing that stock prices are being driven by hype rather than fundamental economic indicators like jobs or consumer sentiment. Dimon has similarly expressed caution regarding the speculative nature of the current rally.
The trend coincides with significant institutional activity, such as Amazon’s recent 31.9 per cent monthly share rise following strong fourth-quarter fiscal 2025 earnings, which reported $213.4 billion in revenue. However, analysts warn that such gains may mask broader structural weaknesses. As Paulsen observes, the explosive rally in new era stocks has created a breakout of optimism that lacks the grounding support of the wider market, leaving investors exposed to potential underperformance or a notable pause in the current trajectory.
