The S&P 500's information-technology sector is under increasing pressure this month, with some investors fearing a bubble has formed in the stock market amid the artificial-intelligence race.

Rob Arnott, chairman of Research Affiliates, told MarketWatch on Monday that he worries some Big Tech stocks in the so-called Magnificent Seven are now in "bubble territory," pointing to Nvidia Corp. (NVDA) and Tesla Inc. Shares of Nvidia, which will report quarterly earnings on Wednesday, fell sharply Monday, dragging down the Roundhill Magnificent Seven ETF MAGS, an exchange-traded fund focused on Big Tech.

The ETF, which holds Nvidia, Tesla $(TSLA)$, Apple Inc. $(AAPL)$, Microsoft Corp. $(MSFT)$, Google parent Alphabet Inc. $(GOOGL)$ $(GOOG)$, Amazon.com Inc. (AMZN) and Facebook parent Meta Platforms Inc. (META), ended 0.2% lower Monday. Nvidia was the worst-performing stock in its portfolio, slumping 1.9%.

"Nvidia has become the spiritual index of the AI cycle, the load-bearing pillar of the market's most crowded macro story," said Stephen Innes, managing partner at SPI Asset Management, in an emailed note Monday.

The S&P 500 has a heavy weighting in the Magnificent Seven, a group of stocks ranging from expensive to being priced so high as to be considered in a bubble - at which point it seems "implausible" that that they will see the growth in revenue and earnings needed to justify current price levels, according to Arnott. In his view, Microsoft appears "almost in bubble territory."

Shares of the Roundhill Magnificent Seven ETF have slid 4.7% so far in November, putting it on pace for its worst monthly performance since March, according to FactSet data.

Five of the seven Big Tech stocks held by the fund fell Monday, with Apple and Meta falling sharply to post the biggest drops after Nvidia. Apple ended 1.8% lower while Meta dropped 1.2%, according to FactSet data. Only Tesla and Alphabet finished in the green.

While Arnott expects that artificial intelligence is "here to stay," and will be increasingly adopted by companies beyond Big Tech over the longer term, he expressed concern that investor enthusiasm has led to an AI bubble. "The marginal buyer" may be "buying the story" about AI without doing the valuation work around company cash flows, he cautioned.

Cracks in AI trade

"Cracks are appearing in the AI trade as the newfound capital intensity of the hyperscalers erodes their free cash flows" and price-to-earnings ratio, warned Stifel chief equity strategist Barry Bannister, in a Nov. 16 note.

The S&P 500's biggest sector, tech XX:SP500.45, fell 1.4% on Monday. Tech's 5.1% slide so far in November has it on track to potentially snap seven straight months of gains, FactSet data show.

Monday's sharp losses for the Technology Select Sector SPDR Fund XLK, an ETF that tracks tech stocks in the S&P 500, left it up just 0.6% so far this quarter. AI chip giant Nvidia is the ETF's top holding, with a 14.8% weight as of Nov. 14, according to data on State Street's website.

Shares of Nvidia, which has a massive market value of around $4.6 trillion, have surged 39% this year through Monday, according to FactSet data.

"Nvidia has beaten the top and bottom line quarter after quarter for so long now that the market is conditioned to expect Nvidia to do that same thing every quarter," said Dave Sekera, chief U.S. market strategist at Morningstar, in emailed comments Monday. "Nvidia has been a key supplier to the largest of the hyperscalers, but we want to learn more about where those sales are becoming more meaningful among the smaller and more upstart companies in AI."

'Reality check'

Bannister expects a "reality check" is in store for bullish investors in the U.S. stock market, amid worries over concentration risk to Big Tech in the S&P 500 and the future path of the Federal Reserve's monetary policy.

He sees downside risks for the S&P 500 partly on concern that the Fed's "free lunch" is over, meaning the Fed may stop cutting interest rates as though a recession was near, even as investors fear one. "As the economy slows in 2026 the Fed would respond, but reactive policy is significantly less bullish than proactive," said Bannister, adding that "a largely new Fed board is unlikely to be seated" until its policy meeting in June 2026.

"We expect a U.S. core real GDP slowdown to emerge, which pressures the S&P 500 versus its year-ago comparison" he wrote.

Bannister anticipates "slightly tighter financial conditions" would arise against the backdrop of a less proactive Fed and then a slowdown. That would lower the price-to-earning ratios for stocks, creating downside risk for the S&P 500 to 6,350 over the next several months, he explained.

Based on the S&P 500's closing level Monday, a drop to 6,350 represents a nearly 5% drop.

The S&P 500 SPX fell 0.9% on Monday to 6,672.41, retreating a third straight day as its tech sector fell under pressure. That marked the S&P 500's worst three-day percentage drop since April 21, leaving the U.S. stock-market index 3.2% below its record closing peak notched Oct. 28, according to Dow Jones Market Data.

"The release of ChatGPT in November 2022 acted as the starting guy for the current AI race," Austin Pickle, investment strategy analyst at Wells Fargo Investment Institute, said in a note Monday.

Although the AI boom and related success of megacap tech stocks has led to comparison with the dot-com bubble in the late 1990s that peaked in 2000, valuation of the S&P 500's tech sector isn't near the dot-com peak levels, according to Wells Fargo Investment Institute.

"Despite being elevated relative to historical norms, technology sector returns and valuations are not near levels reached by the market peak of the dot-com bubble in 2000," Wells Fargo said in the note.

Still, Wells Fargo Investment Institute is "rebalancing away" from the S&P 500's communication-services and information-technology sectors - two of the areas in which Big Tech stocks reside.

"While we believe artificial-intelligence (AI) stocks are not at 2000 bubble levels, their valuations were a key consideration in our recent rebalancing away from" the S&P 500's communication-services and tech sectors into utilities, industrials and financials, the firm wrote.