Biggest industry sector

Semiconductors now represent almost 18% of the total market capitalization of the S&P 500, up from only 5% four years ago. This extraordinary rise reflects the massive global AI infrastructure race currently dominating financial markets. Hyperscalers are expected to spend close to $1 trillion next year on AI-related CAPEX, mainly in semiconductors, data centers and computing power.

The sector’s recent move has been close to parabolic, with semiconductor stocks rising more than 50% in only six weeks. While earnings growth remains strong, valuations have expanded even faster. The sector now trades at around 5x sales and close to 50x earnings, meaning markets are pricing in several more years of extremely strong growth and continued AI investment acceleration.

This does not necessarily mean the trend ends tomorrow. Powerful technological revolutions often create periods of exuberance before fundamentals fully catch up. But it does mean that market concentration and expectations are becoming increasingly elevated. In such environments, even small disappointments on spending, margins or growth can create significant volatility.

At ECP, we continue to believe that equities remain the key long-term driver of wealth creation. But periods like these also remind investors that valuation discipline and diversification remain essential, particularly when enthusiasm becomes concentrated around a narrow number of winners.