Tech shares slid hard yesterday and kept falling this morning. The drop exposed how much the market now leans on a small set of companies. I walked through the numbers, the valuation gap, and what that could mean for portfolios. The message is simple: concentration is high, prices are rich, and the path back to normal may be bumpy.
“Tech stocks got crushed yesterday down 3% and off another percent and a half this morning.”
How Concentrated Is the Market Right Now?
Tech sits at the center of the U.S. stock market. By sector, it now makes up about 36% of the S&P 500. Communication services hold another chunk of the same story because it is mostly Google, Meta, and Netflix. That adds roughly 10%. Together, those two slices get to 46%.
Add Amazon at around 4% and Tesla at about 2%. Those are not coded as “tech” by the index. But let’s be honest, they trade like tech and drive the same themes. That brings the total to about 52% of the S&P 500 tied to big tech engines.
I manage money for a living, and I can say this level of concentration is rare. A majority of the index now depends on one broad theme: growth tied to software, data, ads, cloud, and AI. When that theme cools, the whole market feels it. When it runs hot, the index surges. That swing shows up fast in daily moves like the one we just saw.
“Now you’re at 52% of the S&P 500. Nosebleed level concentration for tech.”
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What Valuations Are Saying
Valuation is the price a company’s earnings command. Over long periods, prices tend to track earnings plus a fair premium. In the tech sector, investors have paid about $18.60 per $1 of earnings on average. Today, they are paying about $31.30 per $1 of earnings.
That is a significant premium. Fast growth, high margins, and durable moats can justify it. It can also be a warning that much of the good news is already priced in. If earnings do not grow fast enough, the market often adjusts by lowering the multiple. That is what people mean when they talk about “multiple compression.”
“Historically, investors pay $18.60 for every $1 of tech earnings. Today, $31.30. If tech earnings stayed flat and the market simply reverted to average valuations, that’s a 41% decline.”
That 41% figure is not a forecast. It is a math check. If earnings freeze and the price-to-earnings ratio rolls back to its long-term average, prices would need to drop significantly to align. The other way out is faster earnings growth, which can close the gap over time. The third path is a mix of the two: some growth and some compression.
Sentiment Has Flipped to Fear
Markets move on two things: numbers and nerves. The numbers tell us valuations are stretched. The nerves are showing up as well. One standard measure, the fear and greed index, has moved into extreme fear. That reading tracks several indicators like price momentum, options activity, and credit spreads. It is not perfect, but it signals mood shifts.
“The market knows this, explaining why the fear and greed index is showing extreme fear.”
When fear spikes, two effects tend to hit at once. Correlations rise, which means many stocks move together. Liquidity thins, so big orders move prices more than normal. In a market where more than half of the index is tech-heavy, spillover can be sharp. That helps explain why broad ETFs can slide even when only a few names miss expectations.
Could Valuations Revert From Here?
Valuation gaps often close over time. The timing is the hard part. I cannot tell you the exact day or month when prices will reset. But there are a few triggers that often start the process.
First, earnings slow. If growth cools, investors push down the multiple. Second, rates stay higher for longer. When cash yields 4% to 5%, the hurdle rate for risk assets rises. That puts pressure on long-duration assets like high-growth stocks. Third, regulatory or competitive risks increase. AI investment cycles are large, and those budgets can squeeze margins if returns take time.
Any one of these can nudge the multiple lower. A combination can speed things up. The opposite is also true. Strong earnings, easing rates, or better visibility on AI returns can keep the premium high. I plan for both cases and size the risk to survive either path.
The Core Facts to Keep in Mind
- Tech and tech-like stocks now make up roughly 52% of the S&P 500.
- Tech trades near 31 times earnings versus a long-term average of around 19 times.
- If earnings stall and multiples revert, the math points to large downside, on paper.
- Sentiment has shifted to fear, which can amplify short-term moves.
What This Means for Everyday Investors
I hold two ideas at once. I respect the long-term power of innovation. I also respect math and risk. If your portfolio is heavy in the top names, you may be riding a single theme without realizing it. That can work for a while. It can also turn a normal correction into a deep drawdown.
As a CIMA and CFP, I build plans that can handle both booms and slumps. The first step is measurement. Know your sector weights. Know your top holdings by name and size. Know your portfolio’s sensitivity to interest rates and earnings shocks. Blind spots cause the most damage when volatility spikes.
Scenario Planning: Simple, Not Fancy
Good risk work does not require fancy models. Start with a few clear scenarios and test your mix against them. I use these often:
Scenario one: Soft landing. Growth slows but holds up. Rates drift lower over the next year. In that case, earnings carry more weight than rates, and multiples can stay elevated if profit growth remains solid. Portfolios with balanced exposure tend to do fine.
Scenario two: Sticky inflation. Rates stay higher, and the gap between cash yields and stock earnings yields remains tight. Long-duration growth stocks can lag, and value or quality income names may hold up better.
Scenario three: Profit miss. Tech leaders invest heavily in AI and cloud, but returns take longer to show. Margins compress. Multiples come down. Indexes with heavy tech weight underperform. Diversified portfolios with risk controls fare better.
Practical Steps to Reduce Fragility
You do not need to overhaul everything at once. Small moves can reduce risk without giving up long-term goals. Here are steps I use with clients:
- Check concentration. Cap single-stock positions and trim overweights.
- Balance growth with quality and cash flow. Strong balance sheets matter if rates stay high.
- Use a cash sleeve with a purpose. Set aside funds for near-term needs to avoid forced selling.
- Stagger entries and exits. Dollar-cost average instead of making one big bet.
- Set guardrails. Predefine ranges for sector and factor exposures.
Reading the Signals Without Overreacting
Big down days grab attention. They can also tempt us to react in ways that hurt long-term results. I try to separate signals from noise. A stretched multiple plus rising rates is a signal. A single headline or rumor is usually noise.
Price action matters, but it is not the only thing. I look for confirmation in earnings revisions, credit spreads, and corporate guidance. If the data show a broad slowdown, I expect more pressure on valuations. If companies keep beating and raising, that can offset some of the valuation risk.
What I’m Watching Next
I will focus on three areas. First, the pace of earnings growth in mega-cap tech and adjacent names. Second, rate expectations set by the bond market, not just central bank speeches. Third, real spend and returns on AI projects. These will tell us whether today’s multiples can hold or whether they need to drift down.
Volatility often creates chances. If you have room and a plan, weaknesses in strong businesses can be an opportunity. Without a plan, volatility can cause panic. That is why I prefer pre-set rules based on risk, not feelings. It keeps decisions steady when screens glow red.
A Straightforward Takeaway
Tech is a massive slice of the market, and it trades at a steep premium. If earnings growth does not keep up, the math points to lower multiples. Fear gauges already reflect that risk. You cannot control the market, but you can control exposure, position size, and your rules for action.
I respect what these companies have built. I also respect the history of valuation cycles. Balance those truths, and you put yourself in a stronger spot for whatever comes next.
