Brokers from Rubinax break down two warning signs hiding inside one of the market’s favorite trades.

The AI boom has handed investors one of the friendliest stock markets in memory. The S&P 500 has posted gains of 24%, 23%, and 16% over the last three calendar years, and it’s already up another 10% this year, on pace for four straight years of double-digit returns, a streak that’s genuinely rare in market history.

But that same rally has quietly built up two risks that a lot of index investors haven’t fully priced in: stretched valuations and unprecedented concentration. Neither one is a reason to panic. Both are reasons to pay closer attention to what’s actually inside your S&P 500 fund.

Expensive or Not? Depends Who You Ask

Whether the market looks pricey right now really comes down to which valuation tool you trust.

The Shiller CAPE ratio, which measures the index against inflation-adjusted earnings over the past decade, currently sits at 42. That level has only been hit once before in history, right before the dot-com bubble popped in 2000.

Look at the forward price-to-earnings ratio, though, and the picture softens. That number is around 21 today, above the long-term average but well below the 2024 peak of 23.7. Given current earnings growth forecasts, stocks arguably look reasonably valued on this measure alone.

Both signals deserve some weight here. A three-plus-year bull run with this much optimism baked in isn’t automatically dangerous, but it’s not the moment to assume prices only go up either.

The Index Has Never Been This Top-Heavy

Here’s the risk that gets less attention: concentration. The tech sector now makes up roughly 40% of the S&P 500, higher than at the peak of the dot-com bubble. On top of that, the 10 largest holdings alone account for nearly 40% of the entire index.

That’s not automatically a red flag while share prices keep climbing. Investors tend to overlook concentration risk when everything is going up. But it does mean the index’s performance now hinges on the fortunes of a small handful of mega-cap companies. If something went wrong with even one of those names, whether an earnings miss or a shift in AI spending expectations, the ripple effect through S&P 500 ETFs could be swift and sharp.

It’s worth remembering that concentration this extreme has historically not lasted forever. Market leadership rotates over time, and the companies that dominate an index during one stretch rarely hold the same weighting a decade later. That doesn’t mean today’s leaders are about to stumble, but it’s a reminder that relying on a small group of stocks to carry an entire index is a bet, whether investors realize they’re making it or not.

One Way to Dial Down Both Risks at Once

If you want to address the valuation and concentration questions in a single move, it’s worth looking at equal-weight index funds, such as the Invesco S&P 500 Equal Weight ETF (RSP).

Because this fund spreads exposure evenly across all 500 companies rather than letting a few giants dominate, single-company risk becomes far less of a factor. Five different sectors carry weightings of at least 9%, spreading the bets much more evenly than a cap-weighted index. Its forward P/E ratio sits at just 17, a notably more conservative valuation than the broader index carries right now.

This approach won’t suit every investor. Equal-weight funds have historically lagged when a small number of mega-cap stocks drive most of the market’s gains, exactly the story of the past few years. But that trade-off is the point: choosing an equal-weight fund means giving up some upside concentration for a smoother, more diversified ride if conditions change.

The Bottom Line for Investors

None of this means the AI rally is over or that the S&P 500 is destined for a crash. It means the same factors that powered these gains, a handful of dominant AI-linked companies trading at rich multiples, could also amplify losses if sentiment shifts.

Investors don’t need to abandon index investing to manage this, just understand what’s actually sitting inside their fund. A standard S&P 500 ETF today is arguably making a concentrated bet on a small group of technology giants, whether or not that was the intent. An equal-weight alternative offers one straightforward way to keep broad market exposure while trimming that concentration down to size.

The AI rally has been genuinely rewarding for anyone who rode it. The next stretch of the market cycle will likely reward investors who checked what’s really driving their returns, rather than assuming the last few years are simply how markets always behave.