S&P 500 Hits a New High, but Gains Are Mostly Driven by AI Trading

The S&P 500 Index hit a new high on Tuesday, but the driving force behind this rally is highly concentrated: a handful of tech giants betting on artificial intelligence are almost single-handedly supporting the entire market, while other sectors such as healthcare, banking, and consumer are falling. The persistent narrowing of market breadth is raising investors’ doubts about whether this rally can be sustained.

On Tuesday, the S&P 500 closed at a record high for the first time since August 13. The Nasdaq Composite also posted a record close for the second consecutive trading day. The "Magnificent Seven" collectively approached a market cap of $25 trillion at the close; according to Dow Jones Market Data, Nvidia alone has surpassed $5.76 trillion in market value. Meanwhile, the 10-year U.S. Treasury yield edged down by 4 basis points to 5.270%, after a large-scale sell-off in the bond market had pushed yields to their highest levels in nearly two decades.

However, behind the new index highs is a fragmented market landscape. According to Dow Jones Market Data, as of Tuesday, less than half of the S&P 500’s constituents closed above their 200-day moving average, and this proportion has been declining steadily since August. Small-caps, blue-chip stocks, and even the S&P 500 Equal Weight Index all underperformed the main benchmarks, with the Russell 2000 notably lagging the S&P 500 over the past month.

After several months of sideways movement early in the year, the "Magnificent Seven" are making a strong comeback. Nvidia rose 4.5% over the past week, setting new all-time highs; Meta has gained 24% since the S&P 500’s previous peak on August 13. AI "hyperscalers" such as Alphabet, Amazon, Microsoft, and Meta have seen their stocks rebound to four-month highs.

Alphabet’s parent company reached a major energy agreement with Constellation Energy—only a week after Amazon announced a similar deal—further reinforcing the market narrative of continuous capital expenditure expansion for AI infrastructure, and boosting sentiment in the tech sector. Sectors related to the AI ecosystem, such as data centers and optical networks, performed strongly.

Mike Dickson, head of research and quantitative strategy at Horizon, commented:

"The Magnificent Seven have seen about two months of strong gains and have now actually caught up with the overall performance of the S&P 500, which is, to some extent, a catch-up rally."

The dominance of tech giants stands in sharp contrast to the current macro environment. The Federal Reserve implemented its first rate hike in three years this September, and rising bond yields have put significant pressure on rate-sensitive sectors such as small-caps, utilities, and homebuilders.

Against this backdrop, cash-rich, relatively low-leverage tech giants have instead been repriced by the market as new 'safe havens.' Keith Lerner, chief investment officer at Truist Advisory Services, said:

"Investors are looking around, asking which areas can withstand all this. To a certain extent, tech stocks are almost being viewed as defensive assets."

Dan Russo, chief investment officer at Potomac Fund Management, added: "High rates and inflation are eroding the value of other stocks in the S&P 500, with only those fortress-like balance sheets among large-caps propping up the entire market." Despite hyperscalers raising tens of billions of dollars to advance AI construction, Russo believes these firms are still better equipped to maintain growth in a high-rate environment than their peers.

Analysts point out that the current pattern of "extremely narrow" market breadth itself poses a risk. Equity returns are highly dependent on a small number of stocks, which could experience sharp volatility due to overspending, free cash flow declines, AI model competition, or other external shocks.

There are also technical resistance signals. BTIG strategist Jonathan Krinsky noted that although it is generally unwise to short a breakout, the cross-signals from market breadth, rates, and credit suggest that the sustainability of this "breakout" may fall short of expectations.

Notably, although hyperscaler stocks have surged, their credit bond markets have not followed suit. The last breakout occurred on August 4 but lasted only two days before the S&P 500 moved sideways for two months—until it set a new high again on Tuesday.

Ross Mayfield, investment strategist at Baird Private Wealth Management, admitted:

"The market feels pretty anxious about this narrowness. In an ideal world, of course, we’d like to see broader participation in the rally. But as long as the largest and most influential stocks in the market are still pushing higher, I think it’s ultimately still a good thing."

Still, there were some signs of improvement in breadth on Tuesday—as 10 of the 11 S&P 500 sectors closed higher for the third straight trading day, the first time since December 2023 that this has happened. Lerner summed up investor sentiment:

"Right now, all roads lead to tech."