AI stock wobble points to US market reliance on tech

NEW YORK (Reuters) - This week's wobble in shares connected to artificial intelligence is a stark reminder that the U.S. stock market is ever more reliant on the technology sector to drive it higher.

Fueled by a long period of strong performance, tech is by far the biggest sector in the S&P 500, accounting for a roughly 36% weight in the benchmark index - a higher level than during the dot-com bubble era 25 years ago, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

With so much riding on prospects for AI, the sector's heavy weighting in major indexes leaves broader markets vulnerable to negative developments, investors said.

"A significant percentage of the S&P is tied to one single sector and one single theme," said Walter Todd, chief investment officer at Greenwood Capital in South Carolina. "If there is some hiccup around (AI) ... anything like that is a risk to the individual names, but also the market overall."

Investors say tech shares might have been due for a breather after a strong run, and such a pullback can serve as a healthy reset that paves the way for further gains. At the same time, with much of Wall Street wary of signs of an "AI bubble" in the stock market, any weakness is being scrutinized as potentially the start of more severe declines.

Stellar tech performance has been a hallmark of the current bull market, which recently surpassed three years. While the S&P 500 has gained 90% during its bull run, the tech sector has gained 186% over that period.

Its recent decline notwithstanding, tech has also been the best-performing of the 11 S&P 500 sectors year-to-date, rising about 27% against an over-15% gain for the broader S&P 500, which remains not far from record highs.

That outperformance means tech's weighting in the S&P 500 has increased from just under 33% at the start of the year to its current level of about 36%. The next biggest sector, financials, has a weight of 13%.

"If the tech stocks go down in any kind of sustained meaningful way, the indexes will go down," said Matt Maley, chief market strategist at Miller Tabak.