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Bullishness over A.I. has inflated the value of the biggest tech stocks to what could be unsustainable levels.

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The Trillion Dollar Club is getting so ritzy, its membership fees climbing to such exorbitant heights, that you’re better off shunning its glamorous sheen and playing your money games on cheaper courses.

Shares of companies in this golden group of five U.S. tech megastocks worth over $1 trillion, as well as two recently deposed members on the verge of regaining their valet parking passes, keep getting pricier and pricier versus the rest of the market. In the process, these stocks have come to account for a bigger and bigger—and now dangerously oversize—share of the S&P 500. In the broader market’s latest surge, from mid-May to mid-June, the club members again grew far faster than the benchmark index—which means that countless investors have more of their wealth than ever tied up in these stocks.

The club’s five official, 13-figure-market-cap roster famously comprises Apple, Microsoft, Google parent Alphabet, Amazon, and new entrant Nvidia. For this analysis, I’ll add two former members that follow the club’s dynamics so closely they could still be wearing the embossed blazers: Tesla and Meta Platforms, formerly Facebook. We’ll nickname the expanded cast the Trillion Dollar Club–plus.

Investing history shows time and again that companies whose shares are pricey relative to the market eventually sink back to earth. So you’d think that folks and funds would be cycling out of these mostly mature tech superstars, which now offer half the earnings for every dollar invested versus the hundreds of other big-caps outside the manicured hedges. But the Club-Plus keeps catching booster rocket after booster rocket in an ascent driven more by momentum and hopes for the future of A.I. than what will really matter—its members’ ability to hit the increasingly lofty earnings targets implied by their stock prices.

The seven stocks are a varied bunch, and some, such as Nvidia, Amazon, and Tesla, look much more extravagantly valued than an Apple or Google. Put simply, if you own an index fund or ETF that tracks the S&P 500, the Trillion Dollar Club–Plus’s practically synchronized takeoff means that a bigger and bigger share of your money has been going into a few huge, extremely expensive stocks. If you’re considering any cap-weighted vehicle that holds a sampling of S&P big names, you’ll likely face the same problem.

And that problem could become a thorny one. The share prices of companies that depend heavily on achieving big profit growth far into the future are extremely vulnerable to a rapid rise in interest rates, which is exactly the phenomenon currently darkening America’s economic outlook. Hence, the Trillion Dollar Club–Plus is at risk of a reversal of its fortunes just as swift and potent as the group’s meteoric rise—and such a turnabout could mostly erase the S&P 500’s big gains for 2023.

The Trillion Dollar Club–Plus led the latest big rally

In the month that ended June 15, our club of seven once again far outraced the overall S&P, and in the process, lifted its weight in the index. On May 15, the club sported a combined market cap of $9.45 trillion. Over the following 30 days, it achieved a combined moonshot. Google posted the lowest gain at 6.5%, while Apple grew 8.1%, Microsoft 12%, Amazon 13.5%, and Meta 19.2%. Nvidia and Tesla reigned, advancing 50% and 55%, respectively. All told, the trillion seven added a staggering $1.58 trillion to their all-in valuation over those four weeks, or nearly 17%, lifting the total to just over $11 trillion.

Since the club’s stock prices grew almost two and a half times as fast as the S&P’s overall 7% increase in that 30-day span, their share of the index’s across-the-board value waxed from 26% to 28%.

The investing trend that has dominated 2023

That two-point gain over just four weeks contributed to an already sizable increase in the club’s power over the S&P 500. At the start of 2023, the seven tech titans sported a total market cap of $7.22 trillion, accounting for 21% of the index. Since then, every club mate has taken off at speeds that dwarfed the nonmembership’s pace. Amazon registered the smallest gain at 23%, while Alphabet jumped 26%, Apple 29%, Microsoft 41%, Tesla 48%, Meta 89%, and Nvidia 118%. By reaching a combined worth of over $11 trillion by mid-June, the Trillion Dollar Club–Plus has added $3.81 trillion in market cap in five and a half months. Think of the club as a single stock that gained 53% in that interlude. The performance of our “Trillion Dollar Club–Plus Inc.” has accounted for 75% of the big-caps’ total increase of $5.1 trillion, or 11.5 percentage points of the index’s 15.3% rise year to date.

So far this year, the club’s moonshot has swelled its standing in the S&P by a staggering seven points, from 21% to 28%. And that’s the problem.

The club’s takeoff made it much, much more expensive

The club’s extraordinary run so far this year stretched the distance between this gilded enclave and the more or less modestly valued neighborhoods occupied by the rest of the S&P 500. In 2022, the group earned a total of $260 billion, Apple proving the largest profit spinner at just under $100 billion. Hence the group’s overall price-to-earnings multiple when the year began, at its then $7.22 trillion valuation, was 28.3. Even then, that was a big number, representing a more than 25% premium to the overall S&P.

We’ve seen only one additional quarter of earnings since the start of 2023, so it isn’t surprising that the club’s total profits for the past four reporting periods are little changed. In fact, their trailing 12-month earnings are down slightly at $256 billion. The club’s market cap explosion of 53% this year hiked its multiple from 28.3 to a towering 43. That’s the sort of premium awarded to shooting stars at the beginning of their biggest growth phases. The only member of the club offering a sub-30 P/E is Alphabet at 28. Apple, Microsoft and Meta are in the 30s, and Tesla, Nvidia, and Amazon hover at 75, 306, and 222, respectively. At present, the seven are selling at 82% over the S&P 500’s P/E of 23.5, and more than double the 20 multiple for the index’s nonmembers.

What happens to the S&P if these high-fliers fall back to earth?

As the club has become a bigger and bigger part of the index, its gains have supercharged the S&P’s advance. But the lopsided mechanics also work in the other direction. If investors suddenly change their minds, and deem these seven players highly overvalued, the decline in their shares will magnify the adjustment in the overall S&P 500—much more now that they account for a bloated 28% of the index’s market cap. Let’s say investors decide to reprice the group at the still formidable P/E of 28.3 that they carried at the close of 2022. If that happens, over $3.8 trillion would disappear from the index’s total market cap of $39.2 trillion, causing a fall of 9.5%. That hit would scuttle nearly two-thirds of the index’s 15% gain so far in 2023.

In other words, the club has grown so big in the S&P that a move back to what investors thought its members were worth at the end of last year—already a high valuation—would kill all but a few points of the big-cap index’s impressive gains for this year. As a group, the Trillion Dollar–Plus Club is looking fabulously overpriced. They’ve been the gorilla that’s driven—you might say bullied—the S&P back into bull market territory. A reset to anything resembling the club’s fair value means the rally mainly carried on a mere seven shoulders will prove short-lived indeed.