FILE PHOTO: Artificial Intelligence words are seen in this illustration taken March 31, 2023. REUTERS/Dado Ruvic/Illustration/File Photo

By Lewis Krauskopf

NEW YORK (Reuters) -The artificial intelligence theme that has propelled markets over the past couple years faces a crucial moment on Wednesday, when bellwether Nvidia Corp reports its second-quarter results.

Technology shares, including a number of signature stocks in the AI trade, have wobbled this month with investors pointing to some signs of caution emerging in the AI industry.

The declines have taken some of the steam out of an array of tech and other stocks that have sizzled since chatbot ChatGPT unleashed a frenzy over the potential for AI about three years ago.

An equal-weighted basket of 50 AI-related stocks tracked by Bespoke Investment Group -- which includes many of the world's biggest tech companies -- has soared nearly 170% since the end of 2022, as of Monday.

"AI is a critical piece of what is driving stocks right now," said Peter Berezin, chief global strategist at BCA Research.

This year, strong gains for number of heavyweight tech stocks exposed to AI have helped power major equity indexes to record highs.

Semiconductor giant Nvidia has ridden its position as the dominant AI player to become the first company to top $4 trillion in market value last month.

Its more-than 30% gain this year alone has accounted for nearly one quarter of the S&P 500's 10.4% year-to-date total return as of Monday, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. More broadly, 10 top AI plays have contributed nearly half of the index's year-to-date return, according to BCA Research.

Shares of data and analytics firm Palantir Technologies, have doubled, while other chipmakers including Broadcom and Advanced Micro Devices have also handily outpaced the broader market.

Earlier in the reporting period, companies such as Microsoft and Google parent Alphabet unveiled significant capital spending, as AI helped results.

AI stock enthusiasm has spread beyond tech and tech-related areas including to utilities and power equipment companies amid spiking energy demand expected to be needed to fuel the technology.

Industrial firm GE Vernova and utilities sector members Constellation Energy and Vistra are among the non-tech stocks that have put up strong gains in the past year, helped by AI excitement.

The AI enthusiasm has helped drive stock valuations well above historical levels. The overall S&P 500's price-to-earnings ratio, based on expected earnings over the next 12 months, last stood at 22.4 times, according to LSEG Datastream. That is near its highest level in over four years, and some 40% above its long-term average of 15.9.

Tech -- which has by far the heaviest weighting in the S&P 500 of the 11 sectors -- has seen its forward P/E rise to 29.2, about 36% above its long-term average of 21.4, according to LSEG Datastream.

"There is a risk that we have gotten a little bit ahead of our skis here and that some of the near-term expectations just won't be realized," BCA's Berezin said.

The P/E valuations for both the tech sector and the S&P 500 are still below highs reached during the late 1990s and early 2000s, when many stock prices ran up to exorbitant levels during the dawn of the internet, leading to a steep fall for tech stocks in the ensuing years.

However, investors have pointed to the increasing presence of the tech sector in market indexes as a sign the market may be overly dependent on the performance of the group.

The tech sector comprises slightly over one-third of the overall S&P 500's market value, not far from the 35% level it reached in March 2000, according to LSEG Datastream.

Meanwhile, the combined market cap of the 10 biggest AI plays, including Nvidia, Broadcom and Microsoft -- stood at $18 trillion, BCA said in a note last week. That amounts to about 33% of S&P 500 stock market capitalization, up from around 15% in late 2022, according to BCA.

Market concentration risk is "real and rising," Anthony Saglimbene, chief market strategist for Ameriprise Financial, said in a note

Nvidia's "commentary on Wednesday could help set the table for how AI trends develop into year-end and, by extension, for a market now anchored to a small group of very large and influential technology stocks," Saglimbene said.

(Reporting by Lewis Krauskopf; additional reporting by Lance Tupper; Editing by Alden Bentley and Nick Zieminski)