The stock market is increasingly diverging under the AI fever! American tech giants are soaring, while small-cap tech companies are unable to shake the "largest gap in thirty years."

The massive spending to compete for the huge potential artificial intelligence dividend has widened the performance and stock price gap between the large tech giants in the US stock market and small-cap tech stocks. The unprecedented AI hype since 2023 has not driven all tech stocks to skyrocket, instead, it has exacerbated the global technology sector differentiation, especially the continued underperformance of small-cap tech stocks. According to long-term statistical data compiled by Bloomberg, measuring the trends of small-cap tech stocks is statistically lagging behind the trends of large tech giants to the greatest extent in history. This year, US tech giants Microsoft Corporation (MSFT.US) and NVIDIA Corporation (NVDA.US) have risen by 24% and 36% respectively. The market capitalization of these two giants has surpassed $4 trillion each, with NVIDIA Corporation ranking first in the global market value rankings and Microsoft Corporation following closely behind, ultimately driving the broad tech index in the US stock market up 16%, while the small-cap tech index has fallen by 1% since 2025. Large tech giants are outperforming - the relative performance of large tech stocks compared to small-cap tech stocks has reached historically high levels Although the dominance of super large tech stocks in the market is not new, their unprecedented dominance over small companies in the stock market has become so significant that Wall Street analysts widely believe that even when the Federal Reserve cuts interest rates, small tech companies have little chance of catching up with the stock price performance of giants like NVIDIA Corporation, Microsoft Corporation, and Alphabet Inc. Class C. To outperform the tech giants, massive resources are needed, which is the core reason why the stock price performance of large-cap tech stocks is much bettereverything they invest in and all their strength will be translated into tangible revenue and performance results, said Dina Ting, head of global index portfolio management at Franklin Templeton. Small and medium-sized companies simply do not have the capability or excess capital to compete with these giants. The AI money-burning game is a "exclusive game" for a few tech giants Take the scale of AI infrastructure investment as an example. Only Microsoft Corporation plans to invest $86 billion in AI-related capital expenditures in the 2026 fiscal year. This size accounts for a significant portion of the market value of the small tech index (approximately $180 billion), not to mention the overall multi-billion dollar level of AI spending by the "Seven Big Tech Companies" in the US stock market. If you want to win a larger scale of AI infrastructure to support the increasingly large AI applications system driven by AI large models, middle and small-cap companies simply do not have the ability to make large-scale AI expenditures, making this so-called "AI money-burning trend" even more difficult for middle and small-cap companies to participate in, with participants almost all being "super large-cap stocks". Looking at the AI spending of the leaders in the US cloud computing industry, the growing AI training/inference cluster funding is huge, which is also why Wall Street has always been cautious about Tesla, Inc. - if Tesla, Inc.'s automotive business remains weak, Tesla, Inc. investment investors led by "Tesla, Inc. believers" will also discount Tesla, Inc.'s future and Musk's "future belief value flow". Analysts' expectations compiled by Bloomberg Intelligence show that analysts on Wall Street expect the four tech giants, Alphabet Inc. Class C, Microsoft Corporation, Meta, and Amazon.com, Inc., to spend over $350 billion in data center expansion or new construction based on AI computing power infrastructure this year. -A year-on-year increase of close to 50% on the basis of strong growth forecast for 2024, it is expected to exceed $450 billion by 2026. In addition, some small AI tech companies that have been in the spotlight in recent years have chosen to remain private, making it difficult for small-cap investors to access. It is worth noting that some emerging software forces, such as Figma Inc., did not choose to go public until they had market values consistent with large-cap stocks. The long-term poor performance of small-cap tech stocks is because global investors do not have enough AI-related stock targets in the small-cap space; and those few tech companies that focus on AI, because the actual AI volume is too small, it is also difficult to compete, said Steven DeSantis, small-cap stock strategist at Jefferies Financial Group Inc. (Jefferies), in an interview. Not only that, but some well-known small-cap software companies (like Wix.com Inc. and Chegg Inc.) may be completely phased out by more powerful AI technology. This is also why the stock prices of these two software companies have fallen by 44% and 22% respectively so far this year. A group of small and medium-sized software stocks in the US stock market have lost billions of dollars in market capitalization due to similar concerns. In the world of small AI companies, C3.ai Inc. saw a sharp decline in its stock price this week after announcing what it called "unacceptable" performance data, and another smaller small-cap AI concept stock, BigBear.ai Holdings Inc., also experienced a rare sharp drop after reporting its performance. These AI concept companies generally stated that they would reduce overall spending due to macroeconomic pressure caused by tariffs. In contrast, tech giants are choosing to increase their AI spending under the burden of tariffs. Meta, the parent company of Facebook, has raised its full-year capital spending floor from $64 billion to $66 billion in 2025, and is expected to spend between $66 billion and $72 billion for the whole year, highlighting the strong growth of this social media giant's advertising business model based on "AI + digital advertising" to support its aggressive investment in AI infrastructure. "Big tech" is increasingly favored by investors, while small-cap tech stocks find it difficult to share the AI feast The unprecedented selling of small-cap tech stocks compared to the increasingly strong financial data and AI capital expenditure of super-large tech companies forms a sharp contrast. The latter is mostly welcomed by the market, or like emerging software giant Palantir Technologies Inc., the continued strong expansion of its performance helps investors overlook its high valuation. However, it is rare for small-cap software companies like Palantir to rapidly transition from a small-cap software company to a large-cap tech stock in recent years. Big tech is getting stronger, while the rest of tech sector stagnates - small tech companies are considered unable to compete with large tech companies This earnings season, about 77% of small-cap tech companies have exceeded expectations in both profitability and revenue, while over 91% of large-cap tech companies have beaten expectations in profitability, and 85% have exceeded expectations in revenue. "The market pays for growth, and the growth you see in large-cap tech companies is clearly better than that of small and medium-sized tech stocks," DeSantis said. He expects that as the trend of global AI deployment accelerates the profit growth of small and medium-sized companies, and the profit growth of large tech giants cools down due to base effects, small and medium-tech stocks will catch up to some extent in profit growth. However, this may not be enough to significantly narrow the gap in stock price performance. "The problem is that as the market size occupied by the seven big tech giants in the US grows larger, if the profit growth between companies in different business areas driven by AI becomes more normalized, will this lead to a broadening of performance and stock price performance? We remain optimistic about the future, but the market has been concerned about small and medium-cap stocks for a long time." "Is it not the 'Big Seven' that are overvalued, but the other 493 companies in the S&P 500 have problems?" Recently, legendary Wall Street value investor Howard Marks made a major statement, saying that the valuation of the US "Big Seven Tech Giants" is not overly high. On the contrary, he believes that there may be issues with the other constituent stocks of the S&P 500 index. The so-called "Magnificent Seven" tech giants that occupy a high weight in the S&P 500 index and the Nasdaq 100 index (about 35%), including Apple Inc., Microsoft Corporation, Alphabet Inc. Class C, Tesla, Inc., NVIDIA Corporation, Amazon.com, Inc., and Meta Platforms, have been the core driving force behind the record highs of the S&P 500 index. Looking at the entire US stock market, the seven tech giants have been the strongest engine driving the entire US stock market since 2023, with their strong market advantage bringing them tremendous revenue from AI, rock-solid fundamentals, years of strong free cash flow reserves, and continually expanding stock buyback programs that attract funds from around the world. However, the high valuation of the seven giants at historical highs has made Wall Street more cautious - six of the seven tech giants have forecasted P/E ratios above 25x, higher than the S&P 500 index valuation, which is also at or near historical highs. Marks, the author of several influential books in the investment field such as "The Most Important Thing for Investment" and "Market Cycles," whose investment wisdom has been recognized by the "Oracle of Omaha" Warren Buffett. Buffett has strongly recommended the book "The Most Important Thing for Investment." Marks recently stated that while the surge driven by the high-weighted "Big Seven" shows a high degree of market concentration, with an average P/E ratio of about 33x, higher than the market average, considering their outstanding products, high market share, high margins, and the world's strongest moat, this valuation is completely reasonable. In contrast, Marks believes that the valuations of the other constituent companies in the S&P 500 index are unreasonable. He pointed out that the average P/E ratio of the other 493 companies in the S&P 500 is as high as 22x, far above the historical average of about 15 times, and warned: "These companies have pushed up the overall index valuation to worrying heights." Marks also pointed out, "It cannot be confirmed for now whether these companies are overvalued, and current conditions do not necessarily mean an immediate valuation adjustment." Mary Ann Bartels, senior strategist at Sanctuary Wealth, known as the "Wall Street Prophet," recently stated that artificial intelligence (AI) will drive profit growth and propel the S&P 500 index to new highs. She currently expects the US stock market to rise to 7,000 points by the end of 2025, a 12% increase from its current historical high. Bartels pointed out that the winners of the US stock market will continue to be winners. She is not worried about the market concentration of large tech companies. Bartels wrote, "Profit growth remains relatively scarce, mainly concentrated in large tech companies and industries related to technology, industry, finance, and utilities that benefit from the accelerated demand for electricity."